Travelzoo

Welcome to the Travel Zoo second quarter 2023 financial results conference call. 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 and presented in the slides that are not statements of historical facts constitute 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 one of the forward-looking statements. Factors that could cause actual results to differ materially from those in forward-looking statements are described in the company's forms 10-K and 10-Q and other SEC filings. 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 today. An archived recording of this conference call will be made available on the TravelZoo Investor Relations website at TravelZoo.com forward slash IR. Now it is my pleasure to turn the floor over to TravelZoo's global CEO, Holger Bartel, its finance director, Lejun Chee, and its general manager, TravelZoo Meta, Arvina Aluwali. Lejun, we'll start with an overview of the second quarter 2023 financial results.

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 website at travelzoo.com forward slash IR. Let's begin with slide number three. Our consolidated Q2 revenue was 21.1 million, up 19% from 17.7 million in the previous year. In constant currencies, revenue was $21.2 million, which is an increase of 20% year-over-year. Operating income, which weighed as management call operating profit, increased 84% year-over-year. Future operating profit was $3.3 million, or 15% of revenues, up from $1.8 million in the prior year. As of June 30, 2023, We had 30.8 million unduplicated members compared to 30.7 million as of June 30, 2022. Slide 4 shows that revenue growth accelerated, particularly in Europe and at Jaxx Flight Club. Year-over-year growth rates were higher this quarter in all business segments when compared to growth in the previous year. On slide five, we go into more detail about the revenues and the operating profits of our two largest business segments, North America and Europe. South America segment revenue increased 1.8 million from 12.4 million to 14.1 million. The operating profit in North America was 3.8 million in Q2 compared to an operating profit of 3.3 million a year ago. Europe segment revenue increased 1.5 million from 4.4 million to 5.9 million. Europe had an operating loss of 239,000 in Q2 compared to an operating loss of 1.5 million in the prior year. On slide six, you can see that our operating margin reached 15% in Q2, up from 10% in the same period last year. The operating margin of 15% in Q2 2023 is much higher than before the pandemic. Before the pandemic, Travel Zoo's reported operating margin was much lower because of losses from our Asia-Pacific business segment. In March 2020, Travel Zoo decided to make Asia-Pacific a licensing business going forward. Now the operating margin shows the true profitability of Travel Zoo in North America and Europe. Slide 7 shows that in North America, the operating margin reached 27% for Q2. On slide 8, we provided information on non-GAAP operating profit, as we believe it better explains how Tribal Zoo evaluates performance. Q2 2023, non-GAAP operating profit was $4.1 million, compared to a non-GAAP operating profit of $2.6 million in the prior year. Slide 9 provides more information about the items that are included in the calculation of non-GAAP operating profits. Please turn to slide 10. As of June 30, 2023, consolidated cash, cash equivalents, and restricted cash was $20.2 million. Our cash balance remains unchanged. Merchant payables decreased by 4.0 million. Slide 1112, Detail of Revenues by Business Segment.

On the interruption, the speaker has disconnected. One moment.

I can continue. Slides 11 and 12 detail our revenue by business segment. The North America business segment saw a year-over-year revenue increase of 1.8 million. Turning to slide 12, the Europe business segment saw a year-over-year revenue increase of 1.6 million. Slide 13 shows how revenues compare 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 costs relatively low in the foreseeable future, while revenues are expected to grow. For Q3 2023, we currently expect growth in revenue and growth in operating income to continue year over year. Let's turn to the next slide. Year-over-year revenue growth accelerated from the first quarter to this quarter. We will continue to leverage Travel Zoo's global reach, trusted brand, and our strong relationships with top travel suppliers to negotiate more exclusive offers for Travel Zoo members. 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 14 provides more information about TravelZoo members. 87% say they are open to new destinations and travel ideas. TravelZoo members are indeed true travel enthusiasts. Slide 16 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, utilize higher operating margins to significantly increase EPS, project flight clubs profitable subscription revenue, and develop travel through meta with discipline. At this point, I'd like to turn over to Arvina.

Hello, everyone. Please turn to slide 19 for an update on the new Travel Zoo Meta service. We opened for founding membership in Q2 2023. The website is meta.travelzoo.com. We are accepting 1 million founding members. Founding members are the early adopters of Travel Zoo Meta who will play a pivotal role in shaping the future of travel in the metaverse. Founding membership is a one-time fee of $20. Each founding member will be entitled to one of the world's first personality-based, emotionally-driven travel companions, NFTs, from an interactive gallery. No two travel companions are the same. Only founding members will also receive an exclusive first-year annual subscription rate and sneak peeks at the first upcoming beta Metaverse travel experiences. Please turn to slide 20 through 23 to see a snapshot of the founding members' only interactive gallery. On slide 24, you can get a glimpse of the travel companions. I'm handing over to the operator for questions for Holger, Lijun, and me.

Thank you. The floor is now open for questions. If you have a question, please press the star key followed by the number one on your touch-tone phone at this time. Once again, if you have a question, ladies and gentlemen, that is the star key followed by the number one on your touch-tone phone. Please hold while we poll for questions. Hey, we'll take our first quick question from Jim Goff with Barrington Research. Your line is now open.

Great. I appreciate the opportunity. One thing I'm very focused on is the cost structure, because I think that was a key advantage, an opportunity you had coming out of COVID to maybe right-size the cost structure. And I wanted to ask if you think it's where it needs to be right now, or do you think it'll you'll be able to rise, increase in certain areas, and how things match up between U.S. and Europe.

Hi, Jim. As we said earlier, we believe that our fixed costs are relatively stable, and they will remain stable for the next few quarters. We believe so. We have some opportunity to decide how much we would like to spend on marketing this quarter. We had great opportunities in the UK and for Czech Flight Club to spend a little bit more on member acquisition. And that's why costs are a little bit up versus the previous quarter. But in general, we believe they will remain at the current level for the foreseeable future.

Okay. A couple of other things. One is I was wondering what you might think of in terms of margin profile overall or U.S. versus Europe, given that you have been able to take advantage of leveraging the fixed cost structure and where you think you might be able to rise to at whatever you think of as a maturity level.

maybe even how long it might take to get there we believe that for the company overall operating margins can go higher you see that the operating margin in north america has been around 30 percent europe is far behind that but as europe is catching up the operating margins in europe uh we expect them to increase as well and uh We believe that we can, for the company as a whole, we can reach overall similar levels of what we are seeing in North America.

Okay. And maybe one last grouping. Jack's Flight Club seemed like it was a great opportunity. The ROI hasn't been so great to this point. I'm wondering what your objectives might be with that. Jack's Flight Club. And if you feel there are any subscription opportunities you've been able to enjoy with Jack's Flight Club that you might apply to the overall operations, the core business.

Yes, we're happy with Jack's Flight Club right now. We finally, after coming out of the pandemic, we finally see members increasing uh in fact paying subscribers were up 30 percent uh you don't see that yet in the revenues because revenue gets reported uh delayed uh and uh so we're quite optimistic about jack's light club and the contributions it can make to the company overall and in terms of using a subscription model in the core business is that still not the best idea Yes, it's something we are looking at for sure. We are doing some tests, and at the appropriate time, we will update you and the investors about what we are planning to do.

All right. Thanks very much. I'll give up so far. Appreciate it.

Sure. Thanks, Jim. Thanks.

Bye. Thank you. Next, we'll go to Ed Wu with Ascendant Capital. Your line is now open.

Yeah, thank you very much for taking my question. There's been a lot of buzz even in the travel industry about AI and machine learning. Are travel zoos doing anything in that area?

Hi, Ed. It's actually something that we have been looking at for quite a while before it even became such a buzzword recently. And yes, we indeed have an initiative underway to leverage AI in a couple of areas of our business.

Great. Is there anything you could talk about, or is it something that you're going to wait until the time is right to discuss?

It's the second. We would like to wait until it's time to discuss. Also, we don't really want to inform our competitors and others what we are planning to do.

Great. Well, it's glad to hear that you guys are also involved in this. But then my next question is on MEDA. You said that the launch has happened in the second quarter and you got a million members, so congratulations. Is that on track with what you guys are expecting? And do you guys have, you know, formal expectations for what number you'll be maybe by the end of this year? Yeah, hi, Ed. Thanks, Olga. Hello.

Hi, Ed. So yes, as I've been mentioning in the previous calls, we are building Travelzoo Meta in phases in a very disciplined manner. So we did launch our founding membership phase, which you can see on meta.travelzoo.com in Q2. And while we cannot disclose any data as yet, because as you can imagine, we are trying to be the first mover. So the data is confidential. We are highly encouraged by the early results. and I do look forward to sharing that with you in due time.

Great. Well, thanks for answering my questions, and I wish you guys good luck. Thank you.

Next, we'll go to Steve Silver with Argus Research. Your line is now open.

Thanks, Operator, and thanks for taking the question. First, I want to congratulate you guys on the continued progress in the balance sheet. It's nice to see that the merchants' payables continue to come down at a significant rate while the cash is being maintained. I guess my main question is just how you're thinking about the recovery in the business, particularly in Europe, given the fact that you've mentioned on the last few calls that Europe is lagging behind North America in terms of the operating margin that you're getting in each place. But yet the company was able to issue a new share repurchase plan. So just trying to get a little bit more color in terms of what you're seeing out of Europe in terms of that gives you the confidence that the operating margin will continue to recover in that way, supporting the share repurchase plans.

Yes, great, Steve. We are indeed very happy with the improvements in the balance sheet. Thanks for noticing that. If you compare our balance sheet to one year ago, it has improved very much indeed. And we were able to do so because we executed exactly what we've been saying for the last year, which is we want to accelerate revenue growth. We want to increase operating margins. We want to increase EPS. We want to improve our balance sheet. We want to grow checks, flight clubs, profitable subscription revenue. And we are seeing all of this happening. So we are actually quite happy. And we are also very pleased with the second quarter. Revenue growth overall is a is higher than Q1. It has accelerated over what we saw last year. So we have very good momentum coming out of the pandemic. When it comes to Europe, one should not look at just the absolute numbers. Yes, the revenue is the same in Q2 as it was in Q1, but the growth rate year over year is now 35%. So finally, Europe is also getting that momentum. And as we said, with a delay, we expect it will also reach pre-pandemic levels as we continue on this course. So we are quite pleased with that. And then what was your third question? It was related to the share repurchase. Yeah, in terms of how the recovery will get there. Yep. Thanks. Yeah, the recovery is fully on track. The profitability of the company is higher than it has ever been. We are generating lots of cash and that gave us an opportunity to repurchase already last quarter a fairly large amount of shares. And we also think we have that opportunity going forward to repurchase more shares. That's why we announced the share repurchase program yesterday.

Great. Thank you so much for the color. Congratulations again.

Hey, next we'll go to Patrick McCann with Noble Capital Markets. Your line's open.

Hey, this is Pat for Mike Kapinski. My first question is if there's any particular impact from economic weakness as it relates to consumers' travel budgets. There might be the appetite for travel, but Are consumers reducing how much they're spending? You know, have you seen anything on that, any impacts to the business? Yeah, I guess I'll leave it at that for my first question.

Yes, we are seeing, we are indeed seeing a trend that demand, particularly for hotels, is weakening. You probably hear that air lines and planes are quite full, but that's also a result of significantly reduced capacity. But what we are hearing from hotels in both North America and Europe, and particularly on the higher end, is that the bookings they are receiving this year are not as strong as what they had last year. The start of the year was quite strong, And so they all expected business would be very, very good again, even better than in the summer of 2022. But that hasn't happened to the level of expectations. This is good for us because more hotels and other travel providers are coming to us and work with us to create these specific offers that are motivating our 30 million members to take additional trips, go some places where they didn't plan to and travel more. So yes, we see this trend, this trend of very, very strong travel demand coming out of the pandemic. We see it weakening. And as I said, it's actually good for us. I believe in the second half of the year, we will have even better opportunities to create exclusive offers for our members.

Sure. And kind of piggybacking on that, are people booking any closer to the dates, as far as closer or further away from the travel dates? Has that trend, has that been trending one direction or another as demand has weakened?

Well, we are not an online travel agent, so we are not a booking site. However, we of course hear from our partners what they are seeing. What happened this year is that people were more comfortable to book in advance. That's why I earlier said bookings at the beginning of the year for summer travel were quite strong. That's different from last year. because last year people were booking more last minute. So what we are hearing is that the booking window is going back to what it was before the pandemic. So in general, we see a lot of normalization. Gotcha.

Thank you. And then I also just wanted to touch on Meta, travel to Meta quickly. Are there any milestones we can take

look for going forward um any you know anything we can kind of yeah any anything we can look for so i can take that um so we you know at this point like i just mentioned we did launch our founding membership phase and we do have milestone milestones we're tracking but again it's a little too early to disclose especially given you're attempting to be the first mover But as and when we approach those milestones, we will update everyone.

OK. Thank you. And yeah, congrats on the solid quarter.

So look, Pat, we are very excited to be in this industry. It's a great industry to be in because what the pandemic showed to people is that it is essential that they would like to leave home and they want to travel. So I think the interest in people to travel is higher than it ever was before the pandemic. Yet, of course, the inflation and potential economic weakness is putting stress on people's purses. And it also creates openings in the travel industry where we come in and we help the travel companies to drive demand into areas where there was less demand. Also, or at periods when there is less demand, all these periods. And in this way, we are creating incredible offers for our members that get them to travel more and really fulfill that desire to get away and learn more about new culture. So we're in a good spot and we're very excited. And it's a good place to be in. But thank you very much. Excellent. Thank you.

And I'm sure we have no further questions at this time. I'll now turn the call back over to Mr. Holder Bartel for any additional or closing remarks.

Sure, dear investors. So thank you for your time and support. 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 disconnect your lines at this time. Have a nice day.