Travelzoo

Hello, everyone, and welcome to the TravelSoup First Quarter 2022 Financial Results Conference Call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for questions following the presentation. Today's call is being recorded. The company would like to remind you that all statements made during this conference call are presented in the slides. There are not statements of historical facts conducive to forward-looking statements. and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could vary materially from those contained in the forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements are described in the company's Form 10-K and 10-Q and other periodic filings with the SEC. Unless required by law, the company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. Please refer to the company's website for important information, including the company's earnings press release issued earlier this morning. An archived recording of this conference call will be made available on the TravelSue Investor Relations website at TravelSue.com. Now it's my pleasure to turn the floor over to TravelSue's Global CEO, Olga Bartel, its Chief Accounting Officer, Lisa Su, and its Global Director Premium Membership, Arvina Aluwalia. Lisa will start with an overview of the first quarter 2022 financial results.

Thank you, Operator, and welcome to those of you joining us today. Please open the management presentation to follow along with our prepared remarks. The presentation in PDF format is available on our investor relations website at TravelZoo.com backslash IR. Let's begin with slide number three. Revenues continue to recover from the pandemic and earnings turned positive again. You can see that our Q1 revenue was 18.5 million, up 30% from 14.3 million year over year. Our net income in Q1 was 3.4 million, which resulted in earnings per share of 19 cents. Compared to the previous quarter, the number of members in Q1 increased by half a million to a total of 30.7 million, mainly due to the acquisition of a competitor's European subscriber base who decided to leave the market during the pandemic. On slide four, we go into more details about the revenues and operating income of our two more significant business segments, North America and Europe. Both of these segments had substantial revenue growth year over year, and compared to the previous quarter which reflects the expected path of recovery. North America revenue grew 22% year-over-year and 36% compared to Q4 2021. The operating income in North America turned positive with an operating income of $1.7 million in Q1 compared to Q4. Europe revenue grew 75% year-over-year and 39% compared to Q4 2021. With an operating income of $200,000 in Europe, the operating income turned positive in Q1 compared to the previous quarter and year. On slide 5, we decided to provide information on non-GAAP operating profit as we believe it better explains how TravelView evaluates performance. This slide shows the non-GAAP operating income, which was $2.7 million in Q1, which is at the highest level in two years. Slide 6 provides details on the items that are excluded in the calculation of non-GAAP operating profit. Please turn to slide 7. As of March 31, 2022, consolidated cash, cash equivalents, and restricted cash were $36.7 million. The cash balance reached the expected level. In the quarter, more members traveled and redeemed their vouchers. As we make payments to hotels, the cash balance decreases, but so do our payables. As of April 1 this year, we changed the refund policy on vouchers, and a majority of vouchers that are now purchased are non-refundable. Slides eight and nine detail our revenues by business segment. When neutralizing FX changes, the North America business segment saw a year-over-year increase of 1.9 million, and the Europe business segment increased by 2.4 million year-over-year. Slides eight and nine detail our revenues by business segment. When neutralizing FX changes, the North America business segment saw a year-over-year increase of 1.9 million, and a Europe business segment increased by 2.4 million year over year. Compared to the prior year period, the travel segment has picked up significantly as advertisers and partners have started coming back. On slide 10, we have been able to lower our fixed costs during the pandemic. We believe we can keep fixed costs relatively low in the foreseeable future, while revenue is expected to grow. We believe this should result in higher profitability going forward. Looking ahead, we currently expect higher revenue and profitability in Q2. We continue to see a trend of recovery in our revenue. However, there could be unexpected fluctuations in the short term. Now I turn it over to Holger.

Thanks, Lisa. So we expect the company's financial performance to improve significantly in 2022. That's because we see more interest from TravelZoo members. We know travel and entertainment companies want to work with us as the industry recovers. If you turn to slide 11, you can see that with over 30 million members and 7 million mobile app users and 4 million social media followers, TravelZoo is loved by travel enthusiasts who are affluent, they're active, and they're open to new experiences. The latest survey results for TravelZoom members in the US show that 58%, in spite of the pandemic, took three or more vacations in 2021. 94% have a valid passport in the US, and that compares to 43% of the US population. Slide 13. gives you an overview of what our management and global team are focused on. We want to seize the exceptional opportunity we have right now for providing our 30 million TravelZoom members with exclusive and irresistible travel offers, entertainment offers and local offers and experiences. We want to increase members more significantly in 2022 and we want to accelerate revenue growth. We want to increase Chex's flight club's profitable subscription revenue, and we want to continue to grow profitability as the demand for travel returns. Now I'm going to turn over to Arvina, who is TravelZoo's global director of premium membership, and she's the executive oversees the launch of TravelZoo NetA, and she will provide us an update.

Thank you, Holger. I am happy to speak about TravelZoo's new initiative towards a paid subscription-based service. It's called TravelZoo Meta, and it will take subscribers to the travel and entertainment experiences of the metaverse. On slide 15, please see our TravelZoo Meta logo. For today's update, we have identified six questions that we believe you, our investors, will be most interested in. The first question on slide 16 is, what is the Metaverse and why is Travelzoo entering the Metaverse? Metaverse is a network of highly immersive shared virtual worlds focused on social connection and interaction in a computer-generated 3D environment. We perceive the metaverse as disruptive and abundant with lucrative opportunities for innovative companies that are willing to be the first movers. In addition, by being part of the metaverse, Travel Zoo Meta believes it can diversify Travel Zoo's current demographic. The next question on slide 17 is what is the market opportunity? The metaverse market size is estimated to be 800 billion in 2024. Approximately 400 billion is the anticipated market size for non-gaming related services. On slide 18, The question is, what is TravelZoom Meta? TravelZoom Meta is a paid subscription-based service that provides its members with exclusive access to unique and cutting-edge metaverse travel and entertainment experiences. These experiences will be sourced from creators globally. Please note, We will not be creating these experiences, but we will be licensing them from creators. We are partnering with skills technologists to enable us to provide high quality experiences to our members. Many of these experiences will be browser enabled and will not require the use of specific VR hardware. The next question on slide 19 is, what is our strategy? We are building travel zoom meta strategically using a phased approach to judiciously navigate the rapidly changing metaverse environment. We will measure and assess the performance of each phase and deploy a process of continuous improvement to monitor progress and pursue next steps accordingly. TravelZoo meta will be managed separately from TravelZoo's core business. On slide 20, the question is, what is the investment required? Travel to Meta is being built out in a cost-efficient manner with no significant upfront investment. The cost of licenses for the experiences will be paid for by pre-registrations initially and annual subscriptions thereafter. And finally, on slide 21, what are the status and timing. Given the newness of the industry, we are spending additional time finalizing a few important technicalities. Contingent on the status of our technical requirements, we are now planning to launch Phase 1 in May. We will provide updates as appropriate. With that, I am handing over to the operator for questions for Holger, Lisa, and me. Thank you.

The floor is now open for questions. If you do have a question, please press the star followed by one on your touchtone phones at this time. Once again, if you do have a question, ladies and gentlemen, that is star followed by one on your touchtone phones. Please hold while we poll for questions. Our first question comes from Jim Goss of Barrington Research.

Okay, thanks, and good morning, or good afternoon, I guess. First, I might make a comment or a question about the presentation you just gave about the metaverse. You say it's going to be managed separately from core business. Why not use it for teasers for trips? that you might provide with elsewhere. And a couple of other things. I was wondering if you could talk about the impact of inflation and the economy and interest rates on offerings you are giving and the willingness of your travelers to engage in your deals. And finally, I was going to ask about the types of deals being offered post-COVID versus previously in terms of maybe any variances you might have, length of trips, what's included, the expense levels, or any other aspects, say beach trips versus educational. And actually, one other one. Jack's Flight Club, do you think that might have a much better opportunity this coming year because of the nature of rising flight prices? I would imagine it would. And thank you.

Hi, Jim. Arvina, you want to start off with the metaverse question, and then I speak about the other three questions.

Yes, Holger. Thank you. Hi, Jim. I have a question on the metaverse, and why aren't we providing teasers? Why are we not considering teasers? The answer is we do believe there are unique opportunities the metaverse will bring, and at this time, there are certain aspects of the business, please understand, we are unable to disclose. But we will provide updates in the due course of time as necessary. Thank you.

Next question.

So on the first question of inflation, what we saw up until I would say maybe a month ago is that most households, and particularly in the US, had quite some resources to spend discretionary. And so you've heard all around that prices for airfare, hotels and so forth are going up quite a bit. There was and still is a lot of pent up demand. More recently and interesting this morning, a study came out that was asking specifically about this question, how are now consumers reacting to inflation? And in that study this morning, seven out of 10 consumers are saying they are adjusting their travel plans this year because of rising prices. We actually see and feel it's a good opportunity for us because the consumer is becoming more conscious about what things cost. That period where consumers were booking expensive hotels just because they wanted to go out and travel seems to be coming to an end. And so we start seeing that there is increased interest in offers that provide good value. So great hotels, great airfare, great vacations at good prices, and that's what Travelzoo does. Which brings me to your fourth question, Jim, about ChexFlight Club, exactly the same here with airfare pricing going up. We heard that some of the airlines said they had the best quarter ever in sales and summer travel being quite hooked up on airlines. consumers and our members are looking for deals and great fares on flights. So we really think that will particularly in the U.S. help us with the growth of Jack's Flight Club. And in terms of deals, our business is shifting more towards advertising again. And you heard in the earlier comments that Lisa made, We switched in most of the markets back to non-refundable vouchers, and the reception by the members has been very good. We haven't received any complaints. People are now confident that they can travel. So this is going to be very good for us because we don't have to keep all these reserves for refundable vouchers for the future, obviously for the ones we sold in the past, but not for the new ones.

All right. Well, thanks very much for taking all the questions.

And your next question comes from Michael Kopinski of Noble Capital Markets.

Thank you, and congratulations on your strong quarter. I was wondering if you could just talk a little bit about your acquisition of Secret Estates. I didn't really get a lot of detail on that. If you can provide some background and then also how much did that contribute in the quarter? I can't remember when you actually closed on that. If you can just kind of give me some background there.

Sorry, I could not hear you very well. What was the question? What acquisition, Michael?

Secret Escape. Oh, yes.

Yes, so we acquired the member base in Spain because they decided to exit that market. Last year, they decided to exit the U.S. We see that many competitors are focusing their exiting certain markets and competition is actually decreasing. And so whenever we see an opportunity to acquire quality members from a competitor or former competitor at terms that are attractive for us, we will do that. And that's what we did in Q1. Yes, we acquired these subscribers in Q1 and that has closed and they were added to our member base in Spain.

Could you tell me how much revenues contributed in Europe as a result of that acquisition?

It's too early to tell, and also we don't break out our numbers in that much detail.

In your guidance, you stated that you anticipated higher revenue and profitability in Q2. Is that guidance referring to higher revenues and profits than fiscal Q1, or are you just referring to the year earlier, Q2?

Higher revenues than both Q1 and Q2 last year. And as we have pointed out today and in the last few calls, we are managing our expenses. We have built a cost basis that is much lower than previous what we had before the pandemic. So as revenues increase, we will see higher profitability.

And can you talk about the cash versus your merchant liability? The percentage coverage ratio of your cash to merchant liabilities has declined from the previous quarter, I think was 67%, now it's 58%. Can you just talk about your comfortability of your merchant liabilities and your cash position?

So you see that in the balance sheet, the merchant payables went down about the same as cash. But keep in mind that with the credit card processors, quite large amounts are kept for a few months in accounts receivables. Maybe not several months. I think it's 30 days. Lisa can probably provide more details on that. It's actually 90 days. 90 days. So you really have to see some of these receivables as cash that is coming in the next few months.

Gotcha. And then final question, what do you believe you need to see your member subscriptions grow to? I mean, your number of subscribers, your total subscribers. What number do you think? I think you said you're at 30.7 million now. What number do you think you need to grow that to?

Yeah, this year we are shifting really back into growth mode. And based on what we know, there's still a lot of opportunity in the markets where we are strong in the US, in Germany, in the UK. So we really don't see any limitation right now to the growth of our member count.

Okay, but there is no specific target that you think that you need to achieve?

No specific target, yes.

Okay. All right. Thank you, and congratulations again. Thanks.

Your next question comes from Ed Wu of Ascendian Capital.

Yeah, congratulations on the quarter. My question is, has there been any easing up in labor shortages or supply chain issues with some of the travel providers so that they could, you know, as the travel demand comes back, that they could expand either hotel occupancy or to be able to put more planes in the sky?

Difficult for us to answer because we are not operating the hotels or airlines. We are hearing the same things that you are reading probably in the media in general, that airlines and hotels have trouble staffing up to 100%. So we hear anecdotally the same things. But we are also hearing that this is slightly changing as the overall economic picture is changing probably throughout this year.

Great. And then my last question is on Europe. You know, obviously, you know, Russia is still, you know, in Ukraine. Have you seen much of an impact at all from, you know, from what's going on in Ukraine and Europe?

We have not really seen any impact on our business or on the interest of consumers to travel. They will just pick a different destination, but we are still seeing in the U.S. strong interest of our members to travel to Europe.

Great. Thanks for answering my questions, and I wish you guys good luck.

Your next question comes from Steve Silver with Argus Research.

Good afternoon, everybody, and congratulations on the progress. It's really exciting to hear the company moving back into growth mode. I guess my main question is, given everything that the company has learned over the past two years as a result of the pandemic, and hopefully we're now squarely on the other side of it, Just trying to get your thoughts on maybe lessons learned in terms of building in flexibility to adjust as conditions change. Just your thoughts on making the company more resilient to potential changes in the travel industry for the long term.

Yeah, I think we all learned valuable lessons over the last two years. We have the benefit that we found some models. We are still over the pandemic. When less people were traveling, we were able to generate revenue. We were able to reduce our expenses. We would be able to do so again should we need to. So, yes, for us, it was surely a great learning experience. And it made us smarter. It made us more focused. And it also brought us back to what is essentially driving the growth of our members in our business.

Great. Congratulations again.

Thanks, Steve.

Okay. And we'll turn back now to Mr. Holgler-Bartel.

Yes. Thanks, ladies and gentlemen. Thank you for your time and support. And we look forward to speaking with you again next quarter. Have a great day.

Thank you ladies and gentlemen This concludes today's teleconference You may now disconnect your lines at this time Have a nice day