Travelzoo Q4 FY2022 Earnings Call

Hello, everyone. Welcome to the Travelzoo Fourth Quarter 2022 Financial Results Conference Call. 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 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 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 CEO, Holger Bartel; its Chief Financial Officer, Wayne Lee; and its General Manager, Travelzoo META, Arveena Ahluwalia. Wayne will start with an overview of the fourth quarter 2022 financial results.

Thank you, Regina, and welcome to those of you joining us today. Please open or 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/ir. Let's begin with Slide #3. Revenue growth accelerated in Q4, leading to much stronger earnings. Our consolidated Q4 revenue was $18.6 million, up 36% from $13.7 million in the previous year, and in constant currencies, it was $19.4 million, which is an increase of 42% year-over-year. Operating income, which we, as management, call operating profit, was $3.6 million, which is approximately 19% of revenues compared to an operating loss of $3.8 million in the prior year. As of December 31, we had $30.4 million unduplicated members compared to $30.3 million as of December 31, 2021. On Slide 4, we go into more details about the revenue and operating profit of our two more significant business segments, North America and Europe. North America segment revenue increased 53% year-over-year from $8.6 million to $13.1 million. The operating profit in North America was $3.7 million in Q4 compared to an operating loss of $2.1 million a year ago. Europe segment revenue increased from $4.3 million to $4.7 million, or 9% year-over-year. At constant currencies, Europe revenue increased 23% year-over-year. Europe had an operating profit of $42,000 in Q4 compared to an operating loss of $1.7 million in the prior year. On Slide 5, you can see that our operating margin for all of 2022 reached 11%, which is at a level higher than our operating margins before the pandemic in 2020. Before the pandemic, Travelzoo's reported operating margin was much lower because of operating losses from our Asia Pacific segment. In March 2020, Travelzoo decided to exit its Asia Pacific business and operate it as a licensing business going forward. Now the operating margin shows the true profitability of Travelzoo in North America and in Europe. Slide 6 shows that our operating margin in North America reached 29% for Q4. On Slide 7, we provide information on non-GAAP operating profit as we believe it better explains how Travelzoo evaluates performance. This slide shows the non-GAAP operating profit, which was $4.8 million in Q4 compared to a loss of $2.4 million in the prior year. Slide 8 provides more information about the items that are excluded in the calculation of non-GAAP operating profit. Please turn to Slide 9. As of December 31, 2022, consolidated cash, cash equivalents and restricted cash was $19.4 million. The cash balance reached the expected level as the number of vouchers outstanding has decreased greatly at the end of 2022. Slides 10 and 11 detail our revenue by business segment. The North America business segment saw a year-over-year revenue increase of $4.5 million. Turning to Slide 11. The Europe business segment, which we report in U.S. dollars, was and continues to be impacted by the strong dollar. We saw revenue in Q4 increase by $384,000. But in constant currencies, revenue increased by $1 million year-over-year. Slide 12 shows that the pandemic led to a significant reduction of fixed costs. We believe we can keep our fixed costs relatively low in the foreseeable future while revenues are expected to grow. For Q1 2023, we currently expect higher revenue and profitability. During the pandemic, we have been able to lower our fixed costs. We believe we can keep our fixed costs relatively low in the foreseeable future.

Thank you, Wayne. Revenue growth accelerated in both North America and Europe, leading to much stronger earnings. As the recovery from the pandemic continues, we will leverage Travelzoo's global reach and trusted brand to further improve earnings in future periods. With more than 30 million members, 7 million mobile app users, and 4 million social media followers, travelers love us for being travel enthusiasts who are affluent, active, and open to new experiences. Slide 13 provides more information about our members. 87% say they are open to new destinations and travel ideas, so Travelzoo members are indeed travel enthusiasts. Slide 15 provides an overview of what management and our global team are focused on. We want to reach and surpass pre-pandemic numbers of members and accelerate revenue growth. We want to utilize higher operating margins to significantly increase EPS, grow Jack’s Flight Club's profitable subscription revenue, and launch Travelzoo META. At this point, I'd like to turn over to Arveena.

Hi, everyone. Today's update will be super quick since the team is pretty busy with the launch of Phase 1 of Travelzoo META in the coming weeks. For today, please turn to the next slide for a first look at one of Travelzoo META's marketing teasers. With that, I'm handing over to the operator for questions for Holger, Wayne, and me.

Our first question comes from the line of Michael Kupinski with NOBLE Capital Markets.

I have a couple of questions. Holger, you mentioned that the next quarter is expected to be a bit better. Can you provide some insights on that? What are you observing regarding travel trends between North America and Europe? Are there any noticeable differences? Additionally, I have a few questions about Jack's Flight Club.

Okay, Michael. So in general, as you see in Q4 and now again in Q1, it's become easier for us to negotiate offers for our members that, of course, results in more activity by our members and also advertisers are back much stronger than last year because there's more confidence in travel. Even with high inflation everywhere and possibly recessions coming, travel is one of the areas where consumers don't want to give up on. They just want to do more for less and are looking for better deals, and that's where we are well-positioned. So we see that continue in Q1. As you saw, North America was a bit stronger. Europe is still lagging a bit. We see that gap closing in Q1 and probably this year. So in general, in Europe, travel activity is also quite good, and our business in Europe is improving better and more quickly now than probably last year, so that's good.

Got you. And then can you give us some color on voucher sales versus advertising in the quarter? And I noticed that as I've been traveling as well that prices in hotel rooms have gone quite high. And then it seems like more recently, we started to see more discounting. I was just wondering if you can add a little bit of color on that, too.

To answer your first question, vouchers were very important during the early days of the pandemic. I would say, even the first two years of the pandemic because people just couldn't travel, and so they purchased the vouchers for future travel. They are less important today, a much smaller percentage of our business than they were in 2020 and 2021. Advertising revenue is now the majority of the revenue that we generate. So we're back to patterns similar to what we saw in 2019. The same goes for travel behavior. Regarding your second question, we are clearly seeing patterns of periods when hotels are busy and periods when they are less busy, and that provides us an opportunity to negotiate great deals for our members again.

You've indicated that there has been an increase in the number of subscribers at Jack's Flight Club, but it seems to me like maybe the effort there has been a little disappointing that we thought there would have been a little bit faster growth. And I know that maybe you've taken your foot off the accelerator on that one. But can you kind of give us your outlook for Jack's Flight Club?

Yes, you're right, it grew less in 2022 than what we were hoping for, but we were also looking for the right time to promote the service. Now that airfares are very high, people are very interested in a service that provides them information about the airfares. In 2023, we are looking at much faster growth of Jack's Flight Club compared to what we saw before.

Got you. And then just a final question about margins. You mentioned that the increase in the margins was due to the absence of losses in Japan, but I believe that you had made some structural changes as well, like decreases in office space and so forth. And I was just wondering now that you moved to more of a licensing agreement in Asia and with the structural changes that you've made, can you kind of give us your thought about what are the prospects of margin improvement and what could be the sustainable margins for the company?

You're absolutely right, Michael. It's a combination of both. We just wanted to make it clear that operating margins before the pandemic were not that much lower if we actually eliminate the investments we made in Asia Pacific. So that was one element. The other element is, of course, as you say, we have changed our cost structure permanently going forward. Well, in Q4, the operating margin in North America was 29%. That's quite good. Before taxes, obviously, but I think we can get the entire business to that level over the long run.

Your next question will come from the line of Jim Goss with Barrington Research.

I am curious how you would evaluate Travelzoo's trends right now relative to broader industry measures for hotels, airlines, and other services that make more direct bookings. And why do you think you would lead or lag any of those particularly broader trends?

So clearly coming out of the pandemic, there was pent-up demand. And as we said in the last quarter, people were traveling even more than they would have without the pandemic. So flights were full. Hotels were completely full. Airlines and hotels were not even operating at the same capacity. Now they're increasing capacity, and people are looking more for value. So in general, when you see travel suppliers having reported relatively good numbers recently. For us, I think 2023 will be a year where we'll be doing better than 2022 just because there is more opportunity for us to do what we are best at, which is negotiating and finding offers for our members that inspire them to travel and helping travel suppliers to really fill those dates when they are not busy and the destinations that may be lesser-known or less busy during off-seasons. That's what Travelzoo is about.

Do you think there might be a reason for lagging behind in direct placements for hotels and flights? Do you believe you will catch up and potentially grow at a rate similar to industry trends once interest in travel picks up again?

Yes. I think that's a good description. You put that forward very well, Jim. In general, when you look back, I mean, a company that's been around for a long time and in periods when people are watching their wallets more closely, and we definitely are entering such times this year with inflation continuing to be high and reducing spending that was spread out by governments across the world, that money is evaporating. People are looking for value and for deals. So I think we are better positioned, but you explained it very well, Jim.

Okay. And within North America, are you noticing a difference in trends between Canada versus the U.S.? And relative to North America vis-à-vis Europe, if Europe could be viewed as a collective continent rather than a group of countries. Is there more interest in international travel on this side of the pond versus that side of the pond?

No difference really between the U.S. and Canada or between Europe and North America. Also, no big differences. Yes, you are right, people love to travel more now across the oceans and to further distances. Europe is particularly popular now for our members in the U.S. We clearly see that they want to go out again and visit Europe. They are also now increasingly interested in Asia Pacific. I would just say that maybe in Europe, the advertisers are a little bit more cautious about coming back to advertising. But we are seeing that improving too.

Okay. One last question. You made a point of saying there are 30 million members, 7.3 million mobile app users, and 4 million social media users. Could you talk about the consistency or differences among those categories in terms of the value and the economics of each?

Not really because there's not a big difference between them since, in the end, we cater to what I explained earlier, travel enthusiasts, people who are inspired by our offers to go to places they didn't even think about. The media through which we reach them might be different, but their interests and behaviors are the same.

Your next question comes from the line of Ed Woo with Ascendiant Capital.

My question is, during the pandemic, a lot of travel suppliers, particularly hotels, reduced their capacity because they couldn't find labor. Has that improved? Do you see more supply coming online, especially with hotels as the labor market improves in the U.S.?

Yes, not only hotels, but also airlines have more capacity, and the hotels have stepped up as well. We see that happening more quickly in the U.S. than in Europe just because of the differences in labor laws. But yes, absolutely, yes.

Great. And what are you seeing for the summer travel season? Do you see it having as robust as it was last summer as everybody came back? Or do you think that is beginning to have more normal trends?

You have to wait and see, but it's a good question, Ed. What we see is that members are booking trips further out than they did last year. For example, we just had a really fantastic offer in New York, and it’s available for summer, and a lot of our members booked trips to New York for summer. We didn't see that quite as much last year. So people are booking trips further out, but we will have to see if people take these trips.

Great. And on the inflation front, have you seen travel suppliers able to pass on increases to consumers willing to pay the higher prices?

Not so much a question for us because we are not a travel supplier, but from what I can see, yes, I think consumers are still accepting the higher prices. Let's see how long that lasts. I expect that will change over the next six months.

Our final question will come from the line of Steve Silver with Argus Research.

Most of my questions have been asked already, but I have a couple left. Holger, you mentioned that the management's focus on expanding the member base appears to be relatively flat year-over-year. I'm curious if there are specific actions that can be taken to significantly grow the user base in the short term, or is it simply expected that former members will return as business conditions normalize?

It's primarily about better communicating the value of our membership to consumers. We haven't done this well over the past two years, but we plan to increase our efforts and invest more in marketing to raise brand awareness. Additionally, the changes occurring in the industry are working in our favor. As someone mentioned, last year people struggled to find hotels at reasonable prices, but now the demand for the type of services we offer is increasing, making us more appealing to millions of travel enthusiasts. Industry trends are benefiting us. While we didn't grow our member base during the pandemic over the last three years, we aim to change that this year.

Great. And just one base of big picture. Over the last couple of years, there have been significant changes in the way both the company has operated in terms of the change of the Asia Pacific business, then weathering the pandemic while I think there are a couple of headwinds left maybe in terms of the higher inflation still and maybe the unfavorable currency exchange at this point. But would you say broadly that in terms of headwinds on the business that Travelzoo's fundamentals are as strong as they've been in quite some time?

Well, you saw we had a very good quarter in Q4. It was our best quarter in the last three years. We're going to have a good quarter again in Q1. So we are very optimistic about 2023. We see that the trends among consumers are helping our business. We see that the trends we are seeing in the industry, with more capacity and greater seasonal patterns in demand, all favor our business. So we're very optimistic about 2023. So yes, we hope we're finally back in a position where we can continue to deliver these really good operating margins that we have seen in Q4 and probably do even better.

I will now turn the call back over to Mr. Holger Bartel.

Well, thanks, everyone, for listening in, and we look forward to speaking with you soon 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.