Travelzoo

Good morning, and welcome to the Travel Zoo fourth quarter 2024 earnings call. Today's conference is being recorded. Currently, all callers have been placed in a listen-only mode, and following management's prepared remarks, the call will be opened for your questions. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If you need to remove yourself from the queue, press star 2. At any time, if you should need operator assistance, press star 0. 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 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. Issued earlier today. And our recording of this 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 floor over to TravelZoo's global CEO, Holger Bartel, its chair, general counsel and CEO of Jack's Flight Club, Christina Chalka, and its financial controller, North America, Jeff Hoffman. Jeff, we'll start with an overview.

Great. Thank you, operator. And welcome to those of you joining us. Today I'm stepping in for Lejeune Chee, our Chief Accounting Officer. 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 forward slash IR. Let's begin with slide four. TravelZoo's consolidated Q4 revenue was $20.7 million, down 2% from the prior year. In constant currencies, revenue was $20.6 million. Operating income, which we as management call operating profit, increased 8% year over year. Q4 operating profit was $4.9 million, or 24% of revenue, up from $4.5 million in the prior year. While operating income increased and outstanding shares decreased, EPS was slightly lower compared to last year, and we'd like to explain why. A year ago, extraordinary income from discontinued operations and relatively high other income from favorable FX trends added $0.05 to quarterly EPS. This year, a strong dollar at the end of 2024 led to negative other income and impacted EPS negatively. Without these effects, the EPS would, in management's opinion, better reflect the positive earnings trend. Slide six shows a revenue increase in both our North America and Jaxx Flight Club segments, while revenues in Europe were lower. This was caused primarily by fluctuations in Germany, which we do not view as a trend. Operating profit increased in both our North America and Jackson Flight Club segments, but decreased in our Europe segment. On slide seven, we break down our categories of revenue. Advertising, membership fee, and other. Advertising revenue was 19.1 million for Q4 2024. Revenue for membership fees increased to 1.6 million. We expect this revenue to grow substantially in 2025. 2024, we introduced a membership fee for TravelSoup. Legacy members who joined before 2024 were exempt from the fee during 2024. Legacy members represent more than 95% of TravelSoup's reach. In 2025, legacy members continue to receive certain travel offers, but club offers and new benefits are only available to club members. We generally see legacy members being excited to become club members. Slide H is an example of membership fee revenue recognition. Revenue from membership fees is recognized relatively over the period of subscription. Member acquisition costs, on the other hand, are recognized painful at the time of the expense. On slide nine, you can see that our gap operating margin was 23% in Q4 2024. Slide 10 shows that in North America, the GAAP operating margin increased to 33% for Q4 2024. On slide 11, we provide information on non-GAAP operating profit as we believe it better explains how Travel Zoo's management evaluates financial performance. Q4 2024 non-GAAP operating profit was $5.4 million. That's 26% of revenue compared to non-GAAP operating profit of $5.2 million in the prior year period. Slide 12 provides information about the items that are excluded in the calculation of non-GAAP operating profit. Please turn to slide 13. Our solid cash position grew even after repurchasing 135,792 shares of the company's outstanding common stock. As of December 31, 2024, consolidated cash, cash equivalents, and restricted cash was $17.7 million. Slide 14 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 fixed costs relatively low in the foreseeable future. Higher revenues would thus increase operating margin. Now, looking ahead, in Q1 2025, we expect revenue to increase at a higher pace. The pro-rata portion of membership fee revenue will already add 5% incremental growth this quarter. This percentage is expected to increase over subsequent quarters as membership fee revenue is recognized gradably over the subscription period. We acquire new members, and more legacy members become club members. For the whole year, we expect substantially higher revenue growth. Over time, we expect profitability to further increase as recurring membership fee revenue will be recognized. I'll now turn this discussion over to Holder.

Thank you, Jeff. We will continue to leverage Travel Zoo's global reach, our trusted brand and strong relationships with shop travel suppliers to negotiate more club offers for club members. Travel Zoo members are affluent, active and open to new experiences. We inspire travel enthusiasts to travel to places they never imagined they could. Travel Zoo is the must-have membership for those who love to travel as much as we do. Slide 15 provides more information about Travel Zoo members. 91% say that they are open to new destinations and travel ideas. We are the club of travel enthusiasts. Slide 17 provides an overview of management's focus. We are working to Grow the number of paying members as we continue to convert legacy members and add new club members. Add new benefits to make paid membership even more valuable. Retain and grow our profitable advertising business from the popular top 20 product. Utilize higher operating margins to increase EPS. Go check flight club's profitable subscription revenue. and develop Travelzoo Meta with discipline. Now, Christina will provide a quick update on Travelzoo Meta and check slides up.

Thank you, Holger. We continue to work 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 Travelzoo Meta in a financially disciplined way. We will provide additional updates in due time. Jack's Flight Club in 2024 expanded the team and increased marketing spend. We increased premium members. We also grew revenue 19% year over year. We continue to generate operating profits. We are well positioned for 2025 to continue this growth trajectory with a focus on further penetration of both the Canadian and U.S. markets. I'm now handing over to the operator for questions for Jeff, Holger, and me.

And at this time, if you wish to ask a question, please press star one on your telephone keypad. You may remove yourself from the queue by pressing star two. Again, please limit yourself to one question and one follow-up. And we'll take our first question from Michael Kupinski with Noble Capital Markets. Please go ahead.

Thank you. My question is really related around the subscriptions. I was wondering if you can give us some color on the added value that you're offering for the subscriptions, the pricing, and maybe on the experience so far that you've had with your subscription. How many legacy members do you anticipate to convert to subscriptions? and any other additional color that you can give us about how your advertisers are viewing the subscription offerings and how that is being balanced, I guess, with your legacy advertising partners.

Hi, Michael. Yes, that's a bunch of questions. Let me start off the membership question. It's a 12-month membership in the U.S. It's 40 U.S. dollars. In the other markets, it's around the same in local currency. And what you receive for that is really all the travel-through offers. And in particular, we have started producing club offers, which are offers that only those who pay for the membership have access to. We just came off the last couple of days our first member day. Member day is an event four times a year. where we have special offers, exclusive offers for our club members. And those were really quite amazing, I would say. We had, for example, London hotels for $99. unheard of. It's a four-star hotel, centrally located, very, very well reviewed on TripAdvisor. We have a Europe trip with flights for 299. We had a countryside escape in the UK for 99 pounds with dinner and hotel and breakfast. I mean, quite unbelievable. I'm just giving these examples because that's what's attracting both new members as well as legacy members to convert. How is it going so far? Well, it's all going according to our plans and it's in line with expectations. We don't release a specific number, but we had a good number of legacy members who already converted to paying members. before the end of last year. And as we are introducing these club offers and additional member benefits, which are exclusive to the members, this motivates legacy member conversion over the current quarter and over the future. We also see better results in member acquisition. We have finally built a robust model that allows us to acquire new members at a cost that works for us. So now we have started scaling. In Q1, for example, we're already on pace to acquire more new members for marketing than we did the entire last year. So we are seeing more growth. And then lastly, I think you asked about the advertising business. Our advertisers continue to reach the travelers that they used to reach in the past. So certainly there's a lot of questions about what's going on, but their offers reach the same people and actually even more people than in the past. And one thing we're also learning is those that have switched to the paid membership model are much more active and much more almost glued to receiving our emails and top trends. It's a little bit like for sure when you pay for something, you want to take advantage. So the responses both in terms of activity, click level, purchases that we are seeing from those who have become paying members of Travelzoo are quite impressive compared to what we saw before.

Roger, thanks for that color. Just to follow up, you indicated that there will be an incremental 8.3 million, I think, or 5% of revenue growth from subscription in the first quarter. Can you talk about the current trends that you're seeing for travel and update us on differences between North America and Europe outside of the subscription?

I would say the U.S. people, I mean, in the U.S., the economy is doing quite well. There is now more uncertainty from a political perspective and particularly to what it means for consumers. But look, the very, very budget conscious travelers are a bit hesitant from what we are seeing, but that's not really our member base. Our member base is more affluent, as you saw earlier from the chart. And higher end and luxury travel in the U.S. and in Canada is still doing quite well. In Europe, I would say we see a little bit more hesitation on consumer side. But, you know, as I always say, that's good for us because if all hotels in London were full, they certainly wouldn't offer a $99 room night at the centrally located four-star hotel. for our highly valued Travel Zoo members. They wouldn't do that. So I'm happy that this was almost a craziness of what we saw after COVID. I mean, they called it revenge travel. And all travel companies were so busy. That has certainly ebbed, and that's good news for us.

Thank you for taking my questions. Appreciate it.

Thank you. And we will take our next question from Patrick Scholl with Barrington Research. Please go ahead.

Hi. I was wondering if you could maybe talk about, like, the continued engagement levels of, like, the members that haven't joined CLOB and what, I guess, sort of has been, what tends to encourage them to join? I guess just what share of, like, the

of those members kind of joined ahead of year end and maybe just talking about like if you could talk a little bit about who has how many have joined since the start of the year so we don't pat we don't see uh much of a change in the behavior of the ones that have not become pay members yet uh click rates are still on click rates per email are still fairly similar to what we saw last year. We're not specifically releasing information on how many members have converted. We don't want to talk about that, but what I can tell you is that And we are currently on pace that at the end of Q1, we will have 50% more paying members than we had at the end of last year. And that focus in one quarter is good for us and makes us happy. But maybe, Christina, you can speak a little bit about what motivates legacy members to become members, paying members, because there's more than just the office. whole range of things that they benefit from. Christina, you want to speak about that for a minute?

Sure. In addition to the offers, which we really believe are the core of the membership and the great service that we've always provided of researching and vetting the offers and identifying these offers, we are also adding other benefits. In Q4, we added lounge access for delayed flights and quite a good response. both from legacy members who are interested in that benefit and also from those external to travel to. We've also launched a weekly giveaway where club members have the opportunity to win, to be randomly selected, to select any top 20 offer that they would like to take for free. In addition to that, we've been building out our member services and have priority member services for club members. And we're excited to potentially add additional benefits as the year progresses.

Okay. Um, and then you had mentioned a weakness in, in Germany, I guess, can you maybe talk about why you feel that that was more of a one-off and maybe just additional commentary around that, uh, around Europe and the ad market there. And then, you know, just how, are there like any sort of marketing expenses that you're pulling back on? in order to market the pay service?

Great. So Europe, we were not happy with Europe in Q4, very clearly. And we were disappointed, particularly with Germany. But the fluctuations were a result of many factors. So just some examples, some destination advertising did not run as planned, some revenue got delayed. uh cruise advertising was slow then on top of that on the accounting side we had the higher true up of annual breakage revenue we have to do that once a year it's a true up versus estimates that came in higher than what we expected because more people used their vouchers and then look uh the political turmoil turmoil in germany in q4 where the government resigned they just had elections last weekend All of that didn't help either. Many consumers and travel companies just went into a holding pattern. And as you see, just all these things came together all at once. But as we said earlier, we don't see that as a trend that would worry us at this time.

Okay. Thank you.

Thank you. And we will take our next question from Steve Silver with Argus Research. Please go ahead.

Thanks, operator, and thanks for taking my question. And congratulations on reaching positive net cash. Looks like this quarter the cash is outpacing the merchant payables for the first time since the pandemic, so congratulations. You guys have been working on that for several years now. The question is, with the expectation of significant ramping in revenues expected over the course of 2025, whether this might have any read-through to your ability to ramp growth investments like Meta while still maintaining discipline. I know you guys have been active in repurchasing shares. Just curious as to whether the ramp in revenues will allow you to increase growth investments as well.

Well, thanks for pointing out the positive development in our balance sheet, Steve. And now actually Pat also asked about marketing, whether we are planning to spend more. And yeah, we are. We are in 2025. We will wrap up marketing spend. We are already doing that in Q1. Why? Number one, we have found a model that works. So if we can acquire paying members at a reasonable cost and we benefit from them over a long period of time. The renewal rates so far that we are seeing, we are happy with them. Then of course we invest because it's a smart decision for the business to do that. And second, as revenues increase and As we were trying to explain earlier, that 5% incremental revenue growth we are seeing in Q1, that number will continue to go up throughout the year because the subscription revenues are only recognized over the course of the 12 months. It's a little bit difficult to really conceptualize that, but that's why we are already happy with what we are seeing in Q1. Will that affect investments in Meta, in Keck Flight Club? No, we look at these quite independently and as we also pointed out, Steve, we are developing meta with quite some discipline. We're not still spending uh millions and millions of billions of dollars on developing that metaverse experience we do it rationally and we don't see that this is effective particularly as our balance sheet is improving and we are generating more cash cash flow discord or cash flow in q4 as you saw was among the highest we have seen in quite some time great thanks for all the additional colors

Thank you. And we will take our next question from Edwu. Please go ahead.

Yeah, congratulations on the quarter. I have a question on the Jack Flight Club membership and the Travel Zoo Club membership. Are they separate products, and are there any plans to combine them so that you have one membership for both products?

I can take that question. For now, we are operating the businesses independently, and that includes the memberships. Since we've acquired Jack's Play Club, we look for ways to find synergies between the two businesses, and that includes some cross-promotion of both the membership and of content identified by either Travel Zoo or Jack's Play Club. And we're doing that in a way that makes sense and is beneficial for both brands. And they serve a slightly different market. So for now, that's the plan is to keep them independent.

Great. Well, thanks for answering my questions. Thank you.

Okay. This concludes the Q&A portion of today's call. I would like to turn the call back over to Mr. Holger Bartel for closing remarks.

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

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