Travelzoo Q1 FY2020 Earnings Call

Hello, everyone. Welcome to the Travelzoo First Quarter 2020 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 these 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 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 Travelzoo Investor Relations website at travelzoo.com/ir. Now, it's my pleasure to turn the floor over to Travelzoo's Global Chief Executive Officer, Holger Bartel; and its Chief Accounting Officer, Lisa Su. Lisa will start with an overview of the first quarter 2020 financial results.

Thank you, operator. And welcome to those of you joining us today. First, please let me explain why we report Q1 earnings today. In March, the SEC issued a release, which allowed companies to delay the filing of their quarterly reports by 45 days due to the circumstances related to the COVID-19 pandemic. This allowed us to have more time for the accounting work related to Travelzoo's acquisition of Jack's Flight Club, the reclassifications required for the Asia Pacific business, and impairment analysis for long-lived assets. Please open the management presentation to follow along with our prepared remarks. The first slide on page number three provides the effects of the COVID-19 pandemic. Revenues decreased year-over-year by $8.9 million. Loss of revenues and certain one-time expenses caused the EPS to go negative. On the next slide, on page four, you can see, due to the effects of the one-time charges in Q1 2020, we have put together a chart to show what the one-time expenses were, which include impairment of goodwill and bad debt, which are directly related to the current pandemic. While our net income from continuing operations was still negative, these one-time non-cash items increased our loss by $2.7 million. Without these non-cash book expenses, the Company would have reported around a $1 million loss for Q1 2020. On page five and page six, our revenue is detailed by business segment. When we provide you FX figures, both North America and Europe recorded a decrease in revenue of 32% due to the pandemic. We saw advertising drop off significantly in March of 2020 in both Europe and North America, due to advertisers reducing or canceling advertising due to the pandemic. Consequently, as shown on page number seven, the operating expenses were relatively flat compared to year-over-year. But we went into a negative position due to the loss of revenue. The Company's cash balance decreased to $14.4 million at the end of Q1 2020, but we expect to generate $13 million to $14 million in cash from operations in Q2, offset by cash used in financing, which includes $6.8 million to pay down the promissory note. We expect to end Q2 with around $24 million to $25 million. On page number nine, the summary is that the Company experienced a revenue decline and lost revenue due to the COVID-19 pandemic. We attempted to reduce expenses through Q1, but by the time we got into the late part of Q1, the effects were evident. We expect the reductions to continue. The Company also had two significant unusual non-cash expenses in Q1 2020, which are related to the impairment, totaling $2.9 million and an increase for bad debt. We discontinued the APAC business, which will eliminate significant overhead that was unprofitable. We also had a one-time write-off regarding various assets. Now, Holger will provide an update on our projections before we open the floor for questions.

Thank you, Lisa. Going into Q2, we were able to adjust our content offering quickly and successfully. After 92% of Travelzoo members told in an online survey they were interested in receiving travel deals if the offers were flexible, we focused our weekly Top 20, which has for the past 20 years been the definitive list of the week’s best travel deals on the internet, on flexible and worry-free offers. Travel dates of most deals are extended to late summer, fall, or even into 2021. Accelerating demand from our members has created a relatively strong business for Travelzoo. In Q2, we have already generated cash flow from operations of more than $11 million quarter-to-date. We also worked on and have already achieved a significant reduction in operating expenses. Please refer to slide 11 and 12. Besides being focused on generating positive cash flow, we will, as previously announced, leverage the opportunity to grow Jack's Flight Club's profitable subscription revenue, particularly in the U.S. where it launched in Q2 2020.

Our first quarter comes from Jim Goss of Barrington Research.

Okay. Thank you. I have several questions. One is, I'm wondering if this situation that has developed and the turmoil creates a market share opportunity for Travelzoo versus bigger competitors. Are there aspects of the business that you think you can penetrate more significantly that might have been owned by them that will not be part of your profile, or other things that might be a positive that might come out of this for you?

Hi, Jim. Yes, I think so. What Travelzoo does is, we are providing our members with irresistible offers that motivate them to go on trips that they didn't think about. So, in that respect, our service to the travel industry is to create demand. At a time when many consumers are hesitant to travel, that's exactly what the travel industry needs. You can imagine that hotels around the world, airlines, and cruise lines all want to see demand? And that's what we do. That's why times like right now are normally good for our business in the past. When we have periods like 9/11 or the economic crisis, it was always a time when our business did quite well. So, yes, I think there's a good opportunity for us over the next few months and probably even for the next one or two years.

But you also talk about the flexible travel deals you're offering. And assuming you need buy-in on the part of the travel providers, I'm just wondering if you could talk about the formulation process and negotiations with those travel providers in creating something that could be more of an issue if there were things you had to buy and resell and then you were on the hook?

Yes, the travel providers like it. But most importantly, the question is do members like it? What our voucher model offers to members is that they can lock in a deal, but they don't have to decide right away when they travel; they can, but they don't have to. And the deal is flexible. In many cases, it's even refundable. So, that allows the members to make travel decisions and plan at the time when the uncertainty is still high and it's not even clear when you can travel to some of these countries. So, that creates the demand I spoke about. That's why the travel industry and particularly hotels and resorts are very happy with that offering right now. It's also an offering that is quite unique. There are no other companies in North America or Europe that have exactly the same model.

You don't have any risk exposure on those flexible travel deals where you're the intermediary, so you don't face issues like a company such as Expedia, which might purchase a certain number of hotel rooms or flights and then resell them. You don't encounter any of that type of exposure in any aspects of your business?

Yes, correct. We don't assume any risk. In fact, we retain the funds and pay them only to the travel providers after the trip is completed.

Okay. The last thing I might ask you is, I think in a number of cases, the global pandemic creates changes that will persist into the future, beyond the current crisis. What would you think of elements that might fall in that category for Travelzoo and for the industry?

Well, we plan, of course, for the industry to take some time to come back. We're not only in travel; we're also in leisure, restaurant activities. We are planning, of course, very prudently for a slow return, but we also believe that the return to travel can come possibly much more quickly than a lot of people expect. In fact, some destinations and hotels in 2021 are already seeing much higher occupancy rates. As you can imagine, after 3.5 months of most people being stuck at home, they are all eager to travel again. We are actually seeing and we have seen already for the last two months that our members are excited to travel again, and we see that in the demand that has accelerated from April to May and to June. So, I think yes, the travel industry could possibly recover much more quickly than people expect right now.

And I might throw in one more, and that relates to international travel and restrictions at airports. Some of the airports that are having lockdowns are reopening but with certain requirements that there might be, say, a 72-hour window in which you need to show evidence that you had a COVID test that proved negative, and you might face something else once you get into that area, and if you show any symptoms, they might quarantine you or charge some significant costs. I wonder how much of the stumbling block that sort of process is going to be to get travel facilitated once again.

We hear that consumers accept it, and our members tell us two things that are important to them. First, flexibility of offers. When they buy a trip, they want to not have to worry about needing to cancel it; and second, cleanliness at hotels, resorts, and airlines. Anything that increases their safety and security is something that they are willing to do and understand. So, that's what we heard back from our members.

Our next question comes from Michael Kupinski with Noble Capital Markets. Your line is now open.

Thank you. Jim addressed many of my questions, which were great ones. I have just a couple more. My question is whether, after travel restrictions are lifted, particularly in the United States, the industry might recover in phases. Experts suggest that consumers may travel more domestically, preferring to drive instead of relying on airlines before they start flying internationally. Do you agree with this assessment? Additionally, I would like to know if U.S. state restrictions are currently impacting travel in North America. Could you provide some insight into the difference between domestic and international bookings?

Yes, Michael, absolutely correct. We're hearing exactly that from our members and we see it in their behavior. The first trips they are taking are to domestic places if they can drive to. The next step is trips within the U.S. or possibly to Hawaii or maybe to Mexico. They are more comfortable with international travel to Europe or Asia Pacific starting in full for sure for 2021. We addressed it with our vouchers; all the vouchers that we have and the travel opportunities we have for trips to Europe and to Asia Pacific or long world trips. All of these offers are valid, at least until 2021. In fact, we even had a couple that were valid until 2022. There was one offer that we negotiated for our members in the Maldives, which broke every record of any deal that we had ever supplied to our members. So, who would have thought how comfortable members would be to travel and purchase a trip to the Maldives? We were quite surprised by that in a positive way. And keep in mind, we are a global business. We're not only in the U.S., but we also operate in Europe. We have a lot of members in Europe. And within Europe, starting July 1st, people can travel around again, everywhere. So, travel restrictions are lifting everywhere. But since our model is based on planning future trips, it's something that doesn't impact us that much right now.

The Maldives offer was compelling. But anyway, in terms of…

Did you buy it?

No, I didn't, but it was very tempting. I wish I could take vacations more often. Regarding domestic versus international travel, is there a significant difference in profitability for you? I'm trying to understand whether it matters much that consumers are traveling more within the country.

There is no difference for us. If you look at the Top 20 this month and compare it to three or four months ago, you will see that in every country where we publish the Top 20, there are many more domestic offers. We can easily adapt and adjust to that.

And one of the big opportunities for you, which could be a significant growth opportunity for you, is the Jack's Flight Club. I was wondering if you could just give me a sense of the benchmarks you hope to achieve, now that you've introduced this to the U.S. in the second quarter, and whether or not, just kind of in general, whether you're seeing subscription take rates that are encouraging. It would seem to me like it'd be kind of a tough time to launch something like this. But, I've been wrong before. So, what are your thoughts about the subscription business in the U.S. at this point?

Yes, it's quite intriguing. Sometimes the outcomes are not what you would expect. Jack's Flight Club began in the UK, and currently, 90% of their subscribers are still in the UK. This quarter, they have expanded into the U.S. One appealing aspect of their business model is that it operates on a subscription basis. As travel companies experienced significant revenue declines, Jack's Flight Club continued to collect subscription fees from its members. We were surprised in April when our members expressed a desire to utilize their time at home to plan future trips, and the information provided by Jack's Flight Club was very valuable to them during that period. Presently, in the U.S., airfares are fluctuating dramatically, featuring numerous sales and both low and high rates that change more rapidly than we've ever observed. The timing for launching the service in the U.S. is arguably the best it has ever been, especially when we saw a round trip deal from New York to Curacao for just $50. We notified our members, and within just one hour, the deal was completely sold out. It seems that members and consumers are very keen to receive this type of information. We believe there is a strong opportunity to introduce this service now, perhaps even better than six months ago. However, only time will reveal the outcome.

It's quite surprising that you are doing so well in the second quarter. I was prepared for something much worse. Could you provide some insights into the revenues for the quarter? I know you've indicated that you're cutting expenses significantly. I'm curious about the amount of expenses you've cut and how much of that is permanent versus temporary. Could you give us a sense of that?

Well, look, revenues in Q2 will clearly be down, no doubt about it. Compared to many other companies, we think, as you said, and thanks for your compliment, we indeed have fared much, much better than a lot of other companies. Lisa explained why our results for Q1 came late. For Q2, we don't see this happening again. Our goal is to provide results for Q2 much more quickly after the quarter end. Then, you will have more insights. On the expense front, I would say that a lot of the reductions particularly in the area of staff costs and marketing, which are our two main expenses, marketing went down by almost 100%, staff and expenses probably by more than 50%. So, there are significant decreases. As we said in the presentation, we are now building a long-term structure to run this business profitably again as quickly as we can. We would like to reach profitability again before the end of this year.

Our next question comes from Ed Woo with Ascendiant Capital.

Yes. Thank you for taking my question. My question is, have you seen any significant differences in how the travelers or consumers react in Europe versus the U.S., particularly in regions that may have been hit earlier like Spain and Italy, versus some of the regions that are getting hit a little bit later like in the U.S.?

Hi, Ed, really interesting question, and the simple answer is it's almost exactly the same everywhere as we said earlier for smaller domestic trips, then more trips with shorter flights, and then longer trips down the road. The only difference you see is that in the U.S. consumers were more optimistic a little bit sooner. Next was Germany, where restrictions were released more quickly than in other countries because Germany was not as much affected. The UK, Spain, and France followed last. But, same patterns everywhere.

And another question is, you're hearing a little bit, particularly in the U.S., about resurgence in cases and possibly in some places, talk about lockdown. Have you noticed any change in consumer behavior, slowing down within the last couple of weeks?

No. In fact, in the past couple of weeks, we saw an even better response from members, but I think that is simply a result of the flexibility that our deals are offering. That's exactly what the members appreciate; no one knows about the future. The product we have allows them to lock in a deal and book it worry-free because if anything happens and any closures happen again, they will not be affected negatively.

My final question is on Jack's Flight Club. Obviously, you mentioned that you launched it recently in the second quarter in the U.S. When all the airlines have stopped flying, did you notice any big attrition from your customer base, subscriber base or Jack's Flight Club?

The attrition rates over that last three to four-month period were pretty much the same as they were before, so no difference there. We didn't see during that period as many new signups as we would have seen before, but that is also now changing. And in the U.S., we haven't really begun promoting Jack's Flight Club to our members. We will do that starting in the next couple of weeks. As I mentioned earlier, I'm quite optimistic that this is a good time to introduce this service to more and more consumers in the U.S.

You're definitely correct about the prices being a lot more volatile and definitely a lot more discounted. But, are there any concerns as airlines either go out of business or significantly reduce, or flight schedules?

We will see. However, if you observe the airline industry, it has received significant support from governments. The weaker companies have already gone out of business, and the ones that remain have strengthened themselves with prudent measures. I am more optimistic about the airline industry than the general consensus suggests. We hear repeatedly that people are exhausted from staying at home. After being unable to travel for three months, interest in future trips only increases. It's similar to being on a diet for three months; it only makes you want to eat again even more. People have a strong desire to travel.

Our next question comes from Steve Silver with Argus Research. Your line is now open.

Thank you and congratulations on the resiliency of the business in the second quarter outlook, it's very impressive considering everything going on in the world. Most of my questions have been answered as well. The one that you really didn’t touch upon on the call was really the sale of the Japan business and the licensing agreement that came out of that. I was hoping you could just touch upon the financial implications for the Company moving forward. The press release mentions that Travelzoo does maintain ownership of the member base from the legacy business. I just want to get a sense as to the economics of the deal and perhaps if Travelzoo does participate in any way in the future as that membership base would grow under the new relationship?

Yes. Steve, I think it's a very positive and attractive agreement for us. We retain ownership of the assets, while at the same time, obviously, eliminating any risk from any performance in Japan. According to the license agreement, Travelzoo Japan K.K. obtained a license to use the intellectual property of Travelzoo. That's the trademark, the software, the processes, etc. And that's exclusively for Japan. In exchange, we receive a royalty payment, which is based on the achievement of certain net revenue targets. So, that's, in a nutshell, what the agreement is about. Great. Thank you, everyone. So, back to the operator then.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Please stay safe and have a nice day.