Travelzoo

Thank you for standing by. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the Travel Zoo first quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during that time, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw that question, again, press star one. Thank you. I would now like to turn the conference over to Lijian Qi, Principal Accounting Officer. You may begin your conference.

Thank you, operator. 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 slash IR. Let's begin with slide number four. TravelZoo's revenue, operating profit, and member count all increased year over year. Our consolidated Q1 revenue was 22.0 million, up 2% from 21.6 million in the prior year. In constant currencies, revenue was 21.8 million, an increase of 1% year over year. Operating income, which we as management call operating profit, increased 19% year over year. Q1 operating profit was 5.6 million, or 25% of revenue, up from 4.7 million in the prior year. As of March 31, 2024, we had 31.0 million unduplicated members, compared to 30.5 million as of March 31, 2023. Slide five shows that revenue growth in our Europe segment more than outside a slight decline in North America. On slide six, we break down our categories of revenue, advertising, membership fees, and other. Advertising revenue increased 1% year-over-year, to 20.9 million from the prior year period. Revenue from membership fees increased 16% year-over-year to 1.1 million from the prior year period. On a consolidated level, we expect the revenue from membership fees to grow over time. During 2024, membership fees have been waived for Legacy Travel Zoo members. Slide seven shows an example of membership fee revenue recognition. Revenue from membership fees is recognized readily over the period of the subscription. Member acquisition costs, on the other hand, are recognized in full at the time of the expense. On slide eight, you can see that our gap operating margins increased to 25% in Q1 2024. Slide 9 shows that in North America, the gap operating margin remained high at 31% for Q1 2024. On slide 10, we provide information on non-gap operating profit as we believe it better explains how Tribal Zoo's management evaluates financial performance. Q1 2024 non-gap operating profit was 6.0 million. That's 27% of revenue. compared to non-GAAP operating profit of $5.5 million in the prior year period. Slide 11 provides information about the items that excluded in the calculation of non-GAAP operating profit. Please turn to slide 12. We maintained a solid cash position even after repurchasing 400,000 Tribal Zoo shares during the quarter. As of March 31, 2024, consolidated cash cash equivalents and restricted cash was $16.9 million, an increase of $476,000 from December 31, 2023. Comparably, merchant payables, which are future payments that we have to make to partners when vouchers are redeemed, decreased by $2.8 million over the same period. Slide 13 shows how revenues compared to operating expenses Most of the company's operating expenses, except for marketing, are relatively fixed in the short to mid-term. We believe we can keep fixed costs relatively low in the foreseeable future. Higher revenues would just increase operating margins. For Q2 2024, we expect continued growth in revenue year over year, albeit at a slower pace than in 2023. We also expect for Q2, 2024 higher profitability year over year. We recognize membership fee revenue relatively over the period. Legacy Travel Zoo members as of December 31st, 2023 exempt from the fee during 2024. Therefore, we do not anticipate generating membership fee revenue from these members before 2025. Now, I turn the discussion over to Holger.

Thank you, Lejeune. We will continue to leverage TravelZoo's global reach or trusted brand and strong relationships with top travel suppliers to negotiate more exclusive offers for members. It is in times of large increases in travel prices that TravelZoo is most valuable for consumers. Travel Zoo members enjoy high-quality travel experiences that represent outstanding value. With more than 30 million members, 8 million mobile app users, and 4 million social media followers, Travel Zoo is loved by travel enthusiasts who are affluent, active, and open to new experiences. Slide 15 provides more information about Travel Zoo members. 91% say they are open to new destinations and travel ideas. We are the club of travel enthusiasts. Slide 17 provides an overview of what management and our global team are focused on. We want to grow the number of Travel Zoo members. We want to leverage strong existing relationships with top travel suppliers. and add new relationships to negotiate more exclusive offers, utilize higher operating margins to increase EPS, grow ChexFlightClub's profitable subscription revenue, and develop TravelZoom Meta with discipline. At this point, I'd like to turn it over to Christina for an update on both ChexFlightClub and TravelZoom Meta.

Thank you, Holger. In Q1, Jack's Flight Club subscription revenue increased 16% year-over-year to 1.1 million. The number of premium subscribers increased 11% year-over-year. In 2024, we want to keep up this momentum with continued investment and member growth, including in new markets like Canada, further refine Jack's Flight Club's strong value proposition, and optimize marketing. Now I'd like to speak about Travel Zoo Meta. We are making progress with the production of the first Metaverse travel experience. It will be browser enabled. As stated in previous earnings calls, we're conscious of developing travel through Meta in a financially disciplined way. We will provide additional updates in due time. I'm now handing over to the operator for questions for Holger, Lejeune, and me.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from Michael Kapinski from Noble Capital Markets. Please go ahead.

Thank you. Thanks for taking my questions. I was wondering if you could talk a little bit about Jack's Life Club. Where is the growth coming from? Is it coming from mostly North America in terms of the number of subscribers? And then of that growth, how many of those new subscribers are actually paid subscribers? And I was just wondering if you can kind of give us a little color on the growth there.

Sure, I can take that question. We have been investing more into member acquisition in the US specifically over the past quarter and year. So a lot of the growth is coming from the US, but we still see significant member acquisition in the UK. It's our largest market and continues to be our largest market. So we're starting to see the US creep up a bit more to be a larger proportion of our paying members. Um, and in general, um, we have been increasing our premium, um, subscriber numbers year over year, as we said. Um, and it, it's a proportion, it's becoming a larger proportion of our free members, but, um, we don't disclose the exact number of the premium subscribers at this time.

And the next question is in terms of, uh, Europe versus the United States or North America. Obviously, you had some disparity in the performance. I was just wondering, what is driving the growth in Europe? And then what do you see happening in the United States? And maybe if you could just give us some color on the current market environment in both continents.

Sure. Look, Michael, we said that Europe is catching up after COVID a little bit more slowly than North America. That's exactly what we are seeing now. We're still seeing good growth in Europe. We're not happy that revenues in North America came in lower this quarter than last year. But look, advertising revenues always fluctuate and there are different reasons. Sometimes offers from advertisers are not that strong. We don't feel comfortable recommending them to our members. Then we lose some advertising revenue. But look, overall, we do not want to compromise on content quality and offer quality. That's most important to us. Sometimes advertisers reduce their spend temporarily or even put it on hold. So we had a couple of advertisers partners that are revamping their website, changing them so they put their advertising campaigns on hold temporarily while they are changing their strategy. But that's why we are now transforming to add subscription revenue to the revenue mix because this will increase revenues overall and also make them more stable because subscription revenue is something that will not fluctuate as much from one quarter to the next.

Your next question comes from James Goss from Barrington Research. Please go ahead.

Okay, thank you. Just to go on a little with that, Holger, so the reason for the slippage in North American revenues was fewer deals being advertised to the client base, and that's primarily the reason for the North American revenue slippage?

What I said, Jim, it's a whole bunch of reasons, and they all come together, and the That's why advertising revenues fluctuate and that's why revenues came in lower in North America than the previous year. But as I said, there's a few different reasons. Sometimes it's advertising partners who just put their campaigns on hold for a quarter or two. So as I said, there's lots of different reasons.

Okay. I think the guidance also pointed to better profitability and Again, in the second quarter, I believe in both North America and Europe. But it didn't mention revenues. Are you thinking revenues are still going to be fairly sluggish, particularly in North America in the current quarter?

Our press release in June said, I believe, that we are expecting in Q2 revenues to also grow versus the prior year. but not as quiet as the same rate as we saw in 2023.

Our next question comes from the line of Steve Silver from Argus Research. Please go ahead.

Good morning, and thanks for taking my question as well. Holger, I was hoping to talk a little bit about the balance sheet. It looks like the balance sheet is continuing to make improvements, and it looks like the company might be on the verge of reclaiming a net positive cash position compared to the merchant payable as early as next quarter. And you mentioned that the company did buy back shares in the most recent quarter. Just trying to get your current thinking on the use of cash in an environment where the company is well-funded. Just trying to get a sense as to whether the mix will start to shift towards using capital for some growth initiatives like Meta Just trying to get your overall thoughts in terms of use of cash as the balance sheet continues to improve.

Yes, Steve, we are happy with the improvement in the balance sheet. Merchant payables are probably now at a level where they will remain quite stable over the next few quarters, which should be positive for operating cash flow. So we expect this to go higher over the next few quarters. Now, use of cash. We used in the last year some of it for share repurchases. That was attractive. The share count has gone down quite a bit. We are, of course, always looking at opportunities to acquire, whether it's parts of businesses like we acquired a couple of times membership basis from other companies. We're also looking to see if there are opportunities to acquire competitors that are not doing that well. And lastly, we're in this transition now to a club model with a paid membership. And we also believe that at some point of time, we will increase our marketing spend, member acquisition spend in order to drive that growth.

Okay, great. Thank you for the extra color.

Our next question comes from Ed Wu from Ascendant Capital. Please go ahead.

Thank you for taking my question, and congratulations on the quarter. My question is, as we're approaching the summer travel season, what are you seeing out there, both in Europe and the U.S., in terms of the consumers as well as the suppliers and how they feel the summer travel season is going to be?

No large changes, Ed, versus what we have seen last year. If anything, I can probably report that what we are hearing from travel partners is that while last year was the year where in particular Americans wanted to venture out, wanted to travel more internationally, wanted to go to more exotic destinations, they are now seeing increased demand for staying closer to home. in general, more interest in vacations in the U.S., less interest in exotic vacations, and also we are hearing that generally people are looking for vacations and trips where they can just relax and recover. So I would say 2023 seems to have been the year of activity and now 2024 may be one where we are seeing more a trend back to vacations being trips that are just really allowing people to recover, relax, and come back home refreshed. One thing we are seeing, by the way, with our paid membership, and this is, of course, one of the reasons why we moved to a club model, is now that we are indeed what the industry is calling a closed user group, which means not everyone is a TravelZoom member. Only those who are joining and who are paying are TravelZoom members. Offers for TravelZoom are not open to the public any longer. It's not sufficient to just enter an email address and purchase that offer. Now that we're in that state, we are seeing that we can source better offers. We can source offers from companies that we didn't work with before. Why is that? Since you know quite a bit about the travel industry, as you probably know, that price parity is a very important issue, particularly for hotels, particularly for cruise lines. So hotels don't want to show a different price, a lower price, a better offer to the public. Now, however, the Travel Zoo is a club, and only those who are in can see these offers. We are obtaining better offers, and that in return is making the Travel Zoo membership more valuable, more attractive, and that's going to be the component of what's going to drive the growth in membership and paid memberships going forward.

Great. Just going a little bit further into the summer travel season, have you noticed any changes in people's spending, whether they're spending less, traveling, fewer amount of days, any macro issues? Are you seeing any of that either in the U.S. or Europe?

No, we have not. That seems to be pretty similar to 2023, both in North America as well.

Your next question comes from Michael Kapinski from Noble Capital Markets. Please go ahead.

Yeah, just a couple of quick follow-up questions here. Of the, I was just wondering in terms of what your experience has been so far in terms of the conversion over to the membership fees of your registered members. are you seeing any variance from what you had seen before and at this juncture do you have an estimate of what how much of those registered registered members will convert to a membership subscription fee so all is going according to plan and according to our expectations um new members

since January 1, 2024, new members that join have to pay the membership fee. And we see members coming in at a rate that's actually what we expected. And the ones that joined before January 1, 2024, as we said, don't have to pay in 2024. We have a plan for how we are converting them, or at least a portion of them, from this status into paying members. We certainly don't want to give up our entire advertising business, so we have a plan for that. You will see at the end of the year what we're going to do. And then we also, as you saw in today's presentation, we are now breaking out revenues into advertising, membership fees, and other. Because we want to give you, the analysts, as well as investors an opportunity to track the progress in how our paid membership is growing. And then, as I said, just responding to Ed, we are now creating offers that are stronger. We need to communicate and we are communicating to our existing members, the legacy members, that the offering is getting stronger because that's going to be an important component to turn them into paying members. members next year.

And Holger, to that end, it was a little surprising to see sales and marketing expenses down in the quarter. I was just wondering if that was an anomaly or if you can just kind of give us your thoughts of what affected that in the first quarter or if that is a good runway that we should be using for 2024.

That's all I have. Thank you. Very good observation indeed. Yes, we didn't spend as much on marketing and member acquisition in Q1. versus previous quarters, we expect this to change and go up in subsequent quarters.

Okay, thank you.

Your next question comes from James Goss from Barrington Research. Please go ahead.

Hi, thank you. I had a follow-up as well. In terms of reaching new potential paying subscribers, I wonder if you might talk a little about the marketing plans you have underway, like how you're doing it, where, what tools you're trying to use, if you might provide a little color along those lines.

Well, it's a very wide range of marketing activities, mostly focused on online, but I really cannot go into all the details, Jim, because we use quite a few tactics. Some of it is around specific offers. Some of it around communicating to non-members what the benefits are of joining. So all of it is really focused on communicating to those who are not yet part of the club that once you join the club of travel enthusiasts, you can expect to obtain extraordinary offers and benefits and it's a worth investment.

Okay, and the other one, and I think you might have alluded to this a little with Michael's question, but you do have plans underway to try to address the current individuals who are getting your emails but choose not to subscribe. You'll be rolling or providing us with more information later in the year that we're suggesting.

Yes, we have a plan for that. It's not going to be a change from one day to the next where things will change drastically. We have a plan for how we are converting them into paying members. All right.

Thank you. Thank you very much.

That concludes our question and answer session. I will now turn the call over to Holger Bartel for closing remarks.

Dear investors, thank you again for your time and support. We look forward to speaking with you again next quarter. Have a great day.

This concludes today's conference call. Thank you for your participation and you may now disconnect.