Travelzoo

Good morning and welcome to the Travel Zoo third quarter 2024 earnings call. Today's conference is being recorded. Currently, all callers have been placed in a listen-only mode. And following the management's prepared remarks, the call will be open for your questions. If you would like to ask a question at that time, please press the star and 1 on your telephone keypad. If you would like to remove yourself from the question queue, press star and 2. At any time, if you do need assistance, please press star and zero. The company would like to remind you that all statements made during the 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 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 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 the conference call will be made available on the company's investor relations website at TravelZoo.com forward slash IR. Now it is my pleasure to turn the call to the floor over to TravelZoo's global CEO, Holger Bartel. its General Counsel and Head of Global Functions and CEO of Jack's Flight Club, Christina Chaka, and its Finance Controller for North America, Jeff Hoffman. Jeff, we'll start with an overview.

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 TravelsWeek.com forward slash IRF. Let's begin with slide number four. Travels' consolidated Q3 revenue was 20.1 million, down 2% from the prior year. In constant currencies, revenue was 20 million. This was a little below our expectations. Operating income, which we as management call operating profit, increased 30% year over year. Q3 operating profit was 4 million, or 20% of revenue, up from 3.1 million in the prior year. Slide 5 shows that higher profits came particularly from our Europe segment. On slide 6, we break down our categories of revenue, advertising, membership fees, and other. Advertising revenue was $18.7 million for Q3 2024. Revenue for membership fees was $1.4 million. Membership fee revenue is still small. We expect to substantially drive revenue and profit growth in 2025 for the following reasons. At the beginning of 2024, we introduced a membership fee. Those who were already members at that time are exempt from the fee during 2024, but have to pay in 2025. We call this group legacy members, and they represent over 95% of current members. Slide 7 shows an example of membership fee revenue recognition. Revenue from membership fees is recognized ratably over the period of the subscription. Member acquisition costs, however, are fully recorded and recognized as expenses immediately. On slide 8, you can see that our GAAP operating income remained high at 20%, which is typically our slowest quarter of the year. Slide 9 shows that in North America, the GAAP operating margin remained high at 25% for Q3 2024. In Europe, the margin increased to 17%. On slide 10, we provide information on non-GAAP operating profit as we believe it better explains how properties management evaluates financial performance. Q3 2024 non-GAAP operating profit was $4.9 million. That's 25% of revenue compared to non-GAAP operating profit of $3.9 million in the prior period year. Slide 11 provides information about the items that are excluded in the calculation of non-GAAP operating profit. Please turn to slide 12. With operating cash flow of $5.3 million, we maintained a solid cash position even after purchasing 552,679 shares of the company's outstanding common stock during the quarter. As of September 30th, 2024, consolidated cash, cash equivalents and restricting cash was $12.1 million. Going forward, we expect our cash balance to increase again as we collect membership fees at the beginning of the subscription periods. Slide 15 shows how revenues compare 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 our fixed costs relatively low in the foreseeable future. Higher revenues would thus increase operating margins. Looking ahead, For Q4 2024, we expect growth in revenue year-over-year, albeit at a smaller pace than in 2023. However, there could be unexpected fluctuations. We also expect for Q4 2024 higher profitability year-over-year and quarter-over-quarter. For 2025, we expect substantial growth in revenue as a result of additional revenue from membership fees. I'll now turn the discussion over to Holder.

Thank you, Jeff. We will continue to leverage Travelzoo's global reach, trusted brand, and our strong relationships with top travel suppliers to negotiate more club offers for our members. Travelzoo members are affluent, active, and open to new experiences. We inspire members to travel to places they never imagined they could. Travelzoo is the must-have membership for those who love to travel as much as we do. Slide 14 provides more information about travel with members. 91% say that they are open to new destinations and travel ideas. We are the club for travel enthusiasts. On slide 16, we provide an overview of our management focus. We are working to convert a large number of legacy members into paying members from January 1st, 2025 on. Add new benefits to make paid membership even more valuable. Retain and grow our profitable advertising business from the popular top 20 products. Utilize higher operating margins to increase EPS. Grow Czech flight clubs' profitable subscription revenue. And develop travel-to-meta with discipline. I'm now handing over to Christina, who will speak about Jack's Flight Club and travel to Meta.

Thank you, Holger. In Q3, Jack's Flight Club had year-over-year increases in revenue of 11% to 1.2 million and in premium subscribers of 14%. Earlier in the year, as previously announced, we implemented a price increase for new subscribers only, expanded into Canada, and improved our marketing strategy. Because of the revenue deferral for subscriptions, we're now starting to see the payoff from these initiatives, including strong CPAs and marketing efficiencies. And we expect this trend to continue into Q4 and 2025. Our focus continues to be on investing in growth while maintaining profitability. Now I'd like to speak about Travelzumeta. We are working on the production of the first metaverse travel experiences. They will be browser enabled. As stated in previous earning calls, we are conscious of developing Travel-Dumetta 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, Jeff, and me.

At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the question queue by pressing star and 2. We do ask that you limit yourself to one question and one follow-up. We will take our first question from Theodore O'Neill with Litchfield Hills Research. Please go ahead. Your line is open.

Theodore O' Okay. Thanks very much. I have two questions for you. First one for Holger. Last quarter you talked about travelers becoming more cost-conscious and price increases for flights and rooms would moderate. Is that still what you're seeing out there? Are you seeing any more or less of that? And my second question is on the operating margin between North America and Europe. I would have expected the European margin to have been lower just relative to economic growth there. I would expect the North American to be about where it is, but I was just a little surprised about the strength in Europe, and I was wondering if you could give us some details on that. Thank you.

Hi, CEO. So on your first question, yes, we are hearing from hotels and airlines that they are seeing generally less demand, better prices, more deals. You might have seen the big brands like Marriott, Intercontinental launching big sales on their hotels for fall. So that trend continues or even accelerates. And yes, consumers are looking for value. We also see that they are looking for less crowded destinations on one hand because they want to go to places that are not overcrowded and on the other hand, places that are less popular are destinations that offer generally better value and that's where we are actually strong by motivating our members to go to places where they haven't been or that they didn't think about or they didn't even know existed. And on the second question, yes, we're happy about Europe. Profit margin there is increasing and getting closer to the one of North America. We just operated very well and efficiently in Europe this quarter, and we expect this trend to continue.

Thank you very much.

We'll take our next question from Michael Dipinski with Noble Capital Markets. Please go ahead. Your line is open.

Thank you. And good day, everyone. Just a couple of quick questions here regarding the membership. Can you give us an idea of what you're anticipating in terms of in 2025, the mix might be between advertising and membership fees, particularly as you roll out your membership fees? And then in terms of you indicated that Q4 should show some revenue growth. Are you seeing improving trends in Americas? And what are you seeing that in terms of Europe? And then are there any membership fees that are starting to filter into Q4 that might be accounted for the improving trends there? And then the final part of that is in terms of the membership fee rollout, I know that you're testing various models and length in terms in pricing and so forth. I was just wondering, have you made any changes to your initial thoughts in terms of the membership fees going forward? And if so, what that might be? to increase quite substantially next year.

With regard to G4, we see membership fee revenue increasing more in 2025 just because the existing members are still exempt. you also asked about what was the next question again about membership fees in q4 um yeah if you're starting to see any increases as you saw and you as you see in q3 um us was really the only market where revenues were um were down uh against our expectations so um wasn't it wasn't the big deal for us we just had some advertisers move their spend into the future. And then we had one who was supposed to launch in Q3. Their website wasn't ready in Q4. So in Q4, we expect things to normalize. But as I said, no, we don't expect yet a substantial growth in membership fees in Q4 just because of the strategy that we have pursued that we are giving the existing members an exemption in 2024.

And Holder, I missed the first part of my question. It was a little jumbled. And I think that was related to the revenue mix between advertising and membership fees in 2025. Could you just repeat that for me?

I said we don't make any forecast yet with regards to how many members, how many paying members we expect in 2025. So we also don't make any forecast yet.

uh for how much membership revenue we expect to generate in that year i gotcha okay thank you and we will take our next question from steve silver with argus research please go ahead your line is open

Thank you, Operator, and thanks for taking the questions. Holder, in the management focus slide, you talked about adding new benefits to the paid membership. I'm just curious if there's any updated thinking in terms of what that might entail, even just in terms of potentially bundling the paid membership and TravelZoom Meta memberships down the line once Meta is ready for a broad rollout. So I'm curious to know what some of those details might be about the paid membership benefits. And then as a follow-up would be, given the strong cash flows that the companies announced, especially in Q3, really what are the uses of cash that you're thinking about moving forward, whether it's just the continued share repurchases and then marketing expenses for customer acquisition on the paid membership side? Thanks.

So, Steve, on the member benefits, we have four in the works right now. And you and our members, if you are also a member, will hear about them in the next few weeks. They mostly have to do with traveling better because we want, if you are a travel member and you travel a lot because you are traveling to Louisiana, we would like you to Just have a better travel experience. We will hear more about that. With regards to the cash flow, we just announced another share repurchase program. So we will continue to repurchase shares because we feel it's a good investment right now. The stock price is still attractive. Also in 2025, when we expect even higher cash flows, we believe we can invest more in marketing and growing the member base in addition to also improving earnings per share.

Okay, great. Thanks for the color.

And we will take our next question from Ed Wu with Ascendant Capital. Please go ahead. Your line is open.

Yeah, thanks for taking my question. Congratulations on the growth. Jack's Flight Club had pretty good year-over-year growth. Is it in all markets now? I know you said that you just extended recently to Canada. And what do you think the long term, do you think Jack's Flight Club could encompass a majority of Kalamazoo members?

Sure, I can answer that. So for right now, we're in the UK, Canada, the US, and certain countries throughout Europe. We are looking into other countries, particularly in Europe, where we can expand. We're also considering whether we launch with alternative language additions beyond just English. So that's in our consideration set as we start our strategic planning for 2025. And then in terms of conversion of TravelZoo members, it was always an attention when we acquired this business. We have seen that TravelZoo members have interest in Jack's Flight Club. Now that TravelZoo has become a paid membership, we are reconsidering what that will look like and ways in which we can kind of offer both services to TravelZoo members. So that's still a bit of a CBD, but it's in progress in terms of discussion.

What is the membership fee for Jackson Flight Club in the U.S. versus in Europe? Are they pretty comparable?

Yeah, it's comparable. It's $60 in the U.S. And in Europe, it is what depends on the currency. But they're basically comparable for conversion.

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

And we'll take our next question from Patrick Scholl with Barrington Research. Please go ahead. Your line is open.

Hi. Thank you. I just had a follow-up question that you talked about on ensuring that, you know, people that travel with TravelZoo a lot have a better travel experience. I was kind of wondering with the shift to the subscription-oriented service, if there's any, like, areas that you felt needed additional investment on either customer service or sort of like your deal research, anything in those areas? And I had a couple other follow-ups.

Over the last couple of weeks, I had the pleasure of participating in many meetings with our existing members. We organized lunches in the UK, in the US, in Canada, and it provided a good opportunity to learn even more from our members. And we are very excited about 2025 there also because The most important thing that our members are getting from Travelzoo are the special prizes on the exclusive experiences that we negotiate for them. When we explain to them why a membership fee which makes Travelzoo what you call a closed user group, why this enables us to deliver even better offers to our members, then they really understand why we are going in this direction they like it because ultimately uh the membership fee which you know ultimately it's a pretty normal amount 40 in the u.s 30 pounds in the uk it's it's relatively insignificant to the hundreds or sometimes thousands of dollars that you can pay and see that it allows us to escape things like price parity for hotels and so forth, and bring them more and better offers, they get very excited. And that's why we feel very positive about this move, and we feel very good about 2025. Now, Pat, you said you had a couple of more questions.

Yeah. So, I mean, maybe this is sort of asking something that Mike had another way, but... With your advertisers, I guess, what are their expectations on the reach of your membership base when you transition to the legacy members onto the paid product?

We decided that for our advertisers, we will maintain their reach in 2025. uh even if you don't uh convert to a member to a paying member in 2025 and you have been a travel to member for a long time you're still able to see the offers you're still able to see top trends you will see the benefits that you are missing out on. You cannot buy the offers that we negotiate exclusively. But for our advertisers, we have come up with a plan that maintains the reach for them. And so with this strategy, we also anticipate to maintain or even grow our advertising revenues next year. And lastly, think of a member who is paying a membership fee. That member is now even more looking forward to the offer that they are receiving. You are more engaged. You paid for something that previously was free. So now you really want to take advantage. And we see that members already in 2024 who paid a membership fee because they joined in 2024, that they are more active and more engaged than those that haven't paid a membership fee previously. Okay, thank you.

And this does conclude the Q&A portion for today's call. I'd like to turn the call back over to Mr. Holger Bartel for closing remarks.

Yes, dear investors, thank you so much again for your time and support, and we look forward to speaking with you again next quarter. Have a great day.

This concludes today's Travel Zoo third quarter 2024 earnings call and webcast. You may disconnect your lines at this time and have a wonderful day.