Travelzoo

NASDAQ:TZOO

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Hello, everyone. Welcome to the [Audio Gap] constitute forward-looking statements [Audio Gap] on the company's [Audio Gap] Investor Relations website at travelzoo.com/ir.

Now it's my pleasure to turn the floor over to Travelzoo's Global CEO, Holger Bartel; Finance Director; Lijun Qi; and its General Manager, Travelzoo META, Arveena Ahluwalia. Lijun will start with an overview.

[Lijun Qi, executive]

Thank you, operator, and welcome to those of you joining us today. Please refer to the management presentation to follow along with our prepared remarks. The presentation in PDF format is available on our Investor Relations site at travelzoo.com/ir. Let's begin with Slide #4.

Travelzoo's revenue, operating profit and the member count all increased year-over-year. Our consolidated Q3 revenue was $20.6 million, up 30% from $15.8 million in the previous year. In constant currencies, revenue was $20.2 million, which is an increase of 27% year-over-year. Operating income, which weighed as management [ core ] operating profit increased 1,039% year-over-year. Q3 operating profit was $3.1 million or 15% of revenue, up from $273,000 in the prior year. As of September 30, 2023, we had 31.2 million unduplicated members, compared to 30.5 million as of September 30, 2022.

Slide 5 shows that Travelzoo's year-over-year revenue growth accelerated further compared to the previous quarter as well as last year. Year-over-year growth rates were higher this quarter in all business segments when compared to growth in the previous year.

On Slide 6, we go into more detail about the revenues and the operating profit of our 2 largest business segments, North America and Europe. North America segment revenue increased $2.9 million from $10.5 million to $13.4 million. So operating profit in North America was $3.0 million in Q3, compared to an operating profit of $1.0 million a year ago. Europe segment revenue increased $1.5 million from $4.5 million to $6.0 million. Europe had an operating profit of $267,000 in Q3 compared to an operating loss of $551,000 in the prior year.

On Slide 7, you can see that our GAAP operating margin was 15% in Q3, up from 2% in the same period last year. The operating margin of 15% in Q3 is much higher than before the pandemic. Before the pandemic, Travelzoo's reported operating margin was much lower because of losses from our Asia Pacific business segment. In March 2020, Travelzoo decided to make Asia Pacific a licensing business going forward. Now operating profit shows the true profitability of Travelzoo in North America and Europe.

Slide 8 shows that in North America, the GAAP operating margin remained high at 22%. On Slide 9, we provide information on non-GAAP operating profit as we believe it better explains how Travelzoo evaluates performance. Q3 2023 non-GAAP operating profit was $3.9 million compared to a non-GAAP operating profit of $1.1 million in the prior year.

Slide 10 provides more information about the items that are excluded in the calculation of non-GAAP operating profit. Please turn to Slide 11. We maintained a solid cash position even after repurchasing 1 million Travelzoo shares during the quarter. As of September 30, 2023, consolidated cash equivalents and restricted cash was $16.6 million, a decrease of $4.0 million from September 30, 2022. Merchant payables decreased $14.5 million from September 30, 2022.

Slides 12 and 13 detail of our revenue by business segment. The North America business segment saw a year-over-year revenue increase of $2.9 million. It was driven by revenue from travel. Revenues from local consisting of local entertainment experiences are still expected to recover from the pandemic.

Turning to Slide 13. The Europe business segment saw a year-over-year revenue increase of $1.5 million. It was driven by revenue from travel. Revenues from local are still expected to recover. Slide 14 shows our revenues compared to operating expenses. Most of the company's operating expenses except for marketing are fixed in the short term or midterm. We believe we can keep fixed lot costs relatively low in the foreseeable future while revenues are expected to grow. Higher revenues would just increase margins. For Q4 2023, we currently expect growth in revenue to continue year-over-year.

Now I turn over to Holger.

[Holger Bartel, executive]

Thank you, Lijun. Year-over-year revenue growth accelerated from Q2 to Q3 again. We will continue to leverage Travelzoo's global reach, our trusted brand and the strong relationships with top travel suppliers to negotiate more exclusive offers for our members. It is in times of large increases in travel prices that Travelzoo is most valuable for consumers. Travelzoo members enjoy high-quality travel experiences and represent outstanding value. With more than 30 million members, 8 million mobile app users, and 4 million social media followers, Travelzoo is loved by travel enthusiasts who are affluent, active and open to new experiences.

Slide 15 provides more information about Travelzoo members. You see that 87% say they are open to new destinations and travel ideas. Travelzoo members are true travel enthusiasts.

Slide 17 provides an overview of what management and our global team are focused on. We want to reach and surpass pre-pandemic number of members and accelerate revenue growth, and more innovative exclusive benefits for travel enthusiasts to make the Travelzoo membership even more valuable, utilize the higher operating margins to significantly increase EPS, grow Jack's Fight Club profitable subscription revenue and develop travel to matter with discipline.

At this point, I'd like to turn over to Arveena.

[Arveena Ahluwalia, executive]

Hello, everyone. At this time, we do not have any significant update for Travelzoo META. That said, we started accepting payments from founding members in Q3 2023. In addition, we are collaborating with best-in-class Metaverse content creators on innovative browser enables Metaverse experiences for founding members. Given the newness of this industry, we have been testing various content, member acquisition and marketing strategies to determine the channels that yield optimal results. We continue to use data to make important decisions and be strategic with the deployment of our investment as we built the service. I look forward to providing additional updates in due time.

I am handing over to the operator for questions for Holger, Lijun and me.

[Operator]

[Operator Instructions] Our first question comes from Michael Kupinski with NOBLE Capital Markets.

[Michael Kupinski, analyst]

I just have a couple of questions here. First of all, congratulations on your good quarter. The gross profit margins were better than expected in a seasonally slow quarter. I was just wondering if you had thoughts on the trajectory for gross margins going forward?

[Holger Bartel, executive]

Michael, yes, you are right, the gross margins fluctuate a little bit due to seasonality. I think in the next 2 quarters, the next year, you will see similar gross margins as we have seen earlier this year.

[Michael Kupinski, analyst]

Got you. And then you've shown an increase in the number of subscribers for Jack's Fight Club, and I know that this was an area that you thought had some significant growth potential. I know that the business started its flight deals, but have you -- and you indicated plans to kind of transition that to more of a travel model. Has that happened? And what are you doing to reflect that strong subscriber growth? Can you add some color on what you're doing in that segment?

[Holger Bartel, executive]

Jack's Fight Club continues to focus on alerting its members and subscribers about great year-for-year offers. And that's what we continue to do. Now that recently, flights and airline prices have gone up so much. There's interest, as we had expected after the pandemic is over, there's increased interest in people hearing about great flight deals, and that's probably the -- [ not ] probably. But that's the main reason why the subscribers for Jack's Fight Club are up. And we are also happy that revenues are up even more. So finally, we are seeing some momentum with Jack's Fight Club, which was the main reason why we invested in this business.

[Michael Kupinski, analyst]

Yes. And at this point, you haven't introduced that to the North America yet because that was originally the plan is to expand that.

[Holger Bartel, executive]

But we have, but only to certain regions, not all of North America yet.

[Michael Kupinski, analyst]

Got you. The ratio of your cash to merchant liabilities continued to improve in the latest quarter. And I know that you repurchased some stock which affected the cash position, but when do you anticipate that cash will start to increase?

[Holger Bartel, executive]

We expect cash to increase this quarter and again next year.

[Michael Kupinski, analyst]

Okay. And recently, the U.S. put a travel advisory for U.S. citizens traveling abroad. Have you seen any impact on this at this point?

[Holger Bartel, executive]

No, we have not seen any impact on it.

[Operator]

The next question is from Ed Woo with Ascendiant Capital.

[Edward Woo, analyst]

What are you seeing out there in terms of hearing from your travel suppliers the outlook for travel. It seems like they held up pretty well during the summer, even with some of the macro issues. What are their outlook heading into the holidays and 2024?

[Holger Bartel, executive]

Ed, people continue to be interested in traveling after pandemic, but that big surge of travel interest that we saw last year is dissipating a little bit. We are hearing, particularly from hotels and airlines in North America, that demand is slowing down and normalizing also probably a result of the higher prices because prices for hotels and flights has gone up tremendously over the last 2 years. And that's, of course, one of the reasons why our service, which helps people find great deals is in great demand at this time, and we think that will continue. In Europe, we see generally, particularly in the U.K., we see consumers be a bit more cautious, also looking for more values. And so I would say that to get back to your question, the demand for the upcoming holiday season is still strong, but lower than what the travel suppliers have seen last year.

[Edward Woo, analyst]

A follow-up question. Have you seen any notice both [ trend ] and people downgrading hotels from Five-star to Four-star or instead of taking a 1-week vacation taking 5 days shorter in vacation just to get the budget lower. Have you seen any noticeable trends in that?

[Holger Bartel, executive]

We have not seen that really, but what we have seen is a higher number of 5-star hotels that are looking to work with us because they are not as busy as they were last year or in summer. So that offers great opportunities for our members because we then negotiate with these hotels exclusive offers and that allows our members to continue to enjoy, for example, 5-star hotels what they would normally be when they went to a 4-star hotel. But we have not seen any indication that there is less demand for upscale properties.

[Operator]

The next question is from Steve Silver with Argus Research.

[Steven Silver, analyst]

Let me offer my congratulations on the quarter as well. My first question, I guess, is related to the META. Arveena, you mentioned that this quarter was a little light in terms of movement in the launch and tracking those types of metrics. Just trying to get a sense as to whether we should be thinking about just looking for statistics on how the launch is going. Are you really thinking in terms of a quarter-over-quarter basis? Or are we looking at maybe something a little geared towards next year just in terms of the signal that you're looking for in order to invest in the business a little bit more aggressively?

[Arveena Ahluwalia, executive]

Yes, thanks for the question. So yes, we are looking for more data in quarter-over-quarter data at this point, like I mentioned earlier, what we've been working on is testing various strategies and seeing which strategies yields the most optimal results for us. But ideally, if you're tracking everything on a monthly and even quarterly data, but given the units of this product and service, it will take some time until we acquire meaningful data.

[Steven Silver, analyst]

Okay. Great. And then one on the balance sheet. Just trying to get a sense as to -- given the fact that there was a little bit of paydown over the last quarter on the merchants payable. Just trying to get a sense as to whether those are a little bit more longer term in terms of coming due or if you think that we're looking at maybe at 2024, more significant reduction in whatever payables will come [ due ].

[Holger Bartel, executive]

Good observation, Steve. Merchant payables were indeed down less than what we had expected. The reason for that is that new voucher sales and purchases in Q3 were higher than we expected. So that led to new merchant payables, while the merchant payables from previously sold about just indeed, went down as we had expected. But net-net, the decrease was not quite as high as a result, that's helped, of course, with higher revenues in Q3 because revenues came in better than what we had forecast. So that was quite good.

And as a reminder, most of the vouchers that are now purchased are nonrefundable. Members can refund them in the first 2 weeks, but after 2 weeks, they become nonrefundable. So the merchant payables today a little bit different than what they were a year ago. But we expect over the next few quarters, merchant vehicles to decrease further. And as I said earlier, we also expect cash to increase over the next few quarters. So the gap between the 2 should become 0 or actually become positive, meaning more cash than merchant payables. That's what we really expect in the next couple of quarters to happen.

[Operator]

The next question is from Jim Goss with Barrington Research.

[Patrick Sholl, analyst]

This is Pat on for Jim. Just had a question with regards to the size of the number base. As you mentioned, the potential increase in interest in finding [ and ] deals just because of price pressure. I'm just wondering if that -- if you guys -- how you guys see the benefits of marketing activity to try to drive membership growth and sort of what, I guess, challenges you might be facing in terms of attracting numbers?

[Holger Bartel, executive]

It is indeed both, on one hand, Pat, we are seeing more members coming to us because they are upset or not happy with the prices they are seeing for hotels and the airlines. And at the same time, we also increased our member acquisition during the third quarter. We were able to do that while still maintaining overall cost and expenses flat versus the previous quarter. So that was quite good. But we did invest more in member acquisition. And as a result, you see that member growth quarter-over-quarter and year-over-year was actually quite good this quarter better than in previous periods.

[Patrick Sholl, analyst]

Okay. And then with, I guess, demand is still relatively high, but maybe flattening. To what extent do you guys feel that you guys -- that you have the capacity within your existing sales force to continue to kind of evaluate or negotiate deals and kind of continue to -- or like do you feel any need just to increase staffing to make sure that you're still presenting a high-quality offers to your members?

[Holger Bartel, executive]

Yes. As I've said over the last 2 years, strong travel demands [ in ] hotels and flights that are full are not very good for us. But now things are slowing down, potentially economy is slowing down. That is good because now more of the travel suppliers come to us and work with us. They want them to pull offers to our members and get more guests into their hotel rooms or on their cruise ships. And that doesn't mean we need more people, Pat, to negotiate these offers and research them. It just makes it easier. There's more competition among them. It's easier to negotiate a better offer that translates then in better deals for our members and, of course, more interest than on the side of our members to take advantage of these offers.

So the expense, as we said over the last couple of years, the expense we have for the team for selling, negotiating, [indiscernible] publishing and so forth is relatively flat whether we have more or less members. So as the member base increases and revenues increase, that doesn't affect the expense side, but it makes it possible for us to increase margins or to invest more in member acquisition to increase the member base further.

[Patrick Sholl, analyst]

Okay. And then I guess the last question I had, kind of similar to Mike's question. I was just wondering what sort of share of revenue to like travel deals from -- to the Middle East generally contribute to quarterly revenue. And I realize it wouldn't be like completely -- complete absence of that revenue if it went away because there would be some offset. But just wondering what sort of impact kind of the geopolitical tensions kind of potentially have?

[Holger Bartel, executive]

It is actually quite slim because offers to the Middle East were -- they don't represent a very large portion of the deals or the offers we make to our members. But apart from countries like Israel, of course, people may be more hesitant to travel to Egypt, I would say that we maybe see a very, very small impact in Europe. But in North America, it's -- the impact is close to 0. Also keep in mind what I said earlier, over 80% of our members are completely open to destinations. So if they cannot go to a certain destination, then they just look to go somewhere else. And that's the beauty about Travelzoo that we are able to show our members and motivate them to go to destinations that they didn't think of. So if they can travel to the Middle East, they will find some other place where they can go to and maybe some places they haven't thought about. And that's how it sort of compensates itself. And so in a nutshell, it really doesn't affect us yet in any meaningful way.

[Operator]

Okay. I'll turn it back now over to Mr. Holger Bartel.

[Holger Bartel, executive]

Great. Thank you. And dear investors, again, thanks for your time and support, and we look forward to speaking with you again next quarter. Have a great day.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect your lines. Have a nice day.