Travelzoo Q1 FY2025 Earnings Call

Good morning, and welcome to the Travelzoo First Quarter 2025 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. Please refer to the company's website for important information, including the company's earnings press release issued earlier today. An archived recording of this conference call will be made available on the company's Investor Relations website at travelzoo.com/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 Ciocca; and its Financial Controller, North America, Jeff Hoffman. Jeff will start with an overview.

Thank you, operator, and welcome to those of you joining us today. Today, I'm stepping in for Qi Lijun, 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/ir. Let's begin with Slide 4. Travelzoo's consolidated Q1 revenue was $23.1 million, up 5% from the prior year and reaching the highest quarterly revenue since the pandemic. In constant currencies, revenue was $23.3 million, up 6% from the prior year. Operating income, which we as management call operating profit, decreased 34% year-over-year as we invested more in member growth. Q1 operating profit was $3.7 million or 16% of revenue, down from $5.6 million in the prior year. Slide 5 shows the strongest revenue growth came from North America and Jack's Flight Club segments, while revenues in Europe increased 1% from the prior year. Operating profit decreased in both our North America and Europe segments, increased slightly in our Jack's Flight Club segment. On Slide 6, we break down our categories of revenue: advertising, membership fees, and other. Advertising revenue was $20.7 million for Q1 2025. Revenue from membership fees increased to $2.4 million. Membership fees are beginning to drive significant and incremental revenue growth and will further accelerate. In 2024, we introduced a membership fee for Travelzoo. Legacy members who joined before 2024, continue to receive certain travel offers. However, Club Offers and new benefits are only available to Club Members who pay the membership fee. Therefore, we are seeing many Legacy Members become Club Members over time, in addition to new members who joined. Slide 7 shows an example of membership fee revenue recognition. Revenue from membership fees is recognized ratably over the period of subscription. Member acquisition costs, on the other hand, are recognized in full at the time of the expense. Slide 8 illustrates that as we grow members, the differing recording of expenses and revenues creates a short-term negative impact on operating income. A continuous addition of new members every quarter increases quarterly revenue only over time. Particularly in the first quarter, that revenue number is even smaller as membership fees are prorated for any members who joined during the quarter. Marketing expenses are recorded immediately in each quarter. After a few quarters, quarterly revenue for membership fees exceeds the advertising expense and the impact turns positive. On Slide 9, you will see that GAAP operating margin was 16% in Q1 2025. Our GAAP operating margin is lower simply because we have started to invest more. Our goal is to accelerate growth in members. Slide 10 shows that in North America, the GAAP operating margin decreased to 24%. And in Europe, the GAAP operating margin remained flat at 3% for Q1 2025. This is driven by the investments in member growth, which occurs in all key markets. In Europe, this overshadows a great financial improvement in Germany, where we saw strong revenue growth year-over-year. On Slide 11, we provide information on non-GAAP operating profit as we believe it better explains how Travelzoo's management evaluates financial performance. Q1 2025 non-GAAP operating profit was $4.3 million. That's 19% of revenue compared to non-GAAP operating profit of $6 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. We repurchased 590,839 shares of the company's outstanding common stock. As of March 31, 2025, consolidated cash, cash equivalents, and restricted cash was $12.2 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 midterm. We believe we can keep fixed costs relatively low in the foreseeable future. But higher investments in member growth are increasing total expenses. We expect these investments to accelerate revenue growth in coming quarters. Now looking ahead, for Q2 2025, we expect year-over-year revenue growth to double. We expect revenue growth to accelerate as a trend in subsequent quarters as membership fees revenue is recognized ratably over the subscription period as we acquired new members and as more Legacy Members become Club Members. Over time, we expect profitability to increase as recurring membership fee revenue will be recognized. In the short term, fluctuations in net income are possible because we might see attractive opportunities to increase marketing. We believe we expense marketing costs immediately. Now I'm going to turn the discussion over to Holger.

Thank you, Jeff. We will continue to leverage Travelzoo's global reach, our trusted brand, and the strong relationships with top travel suppliers to negotiate more Club Offers for Club Members. Travelzoo members are affluent, active, and they are open to new experiences. We inspire travel enthusiasts 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 15 provides more information about Travelzoo 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 management's focus. We are working to grow the number of paying members and accelerate revenue growth by converting Legacy Members and by adding new Club Members, adding new benefits to the paid membership, retaining and growing our profitable advertising business from the Popular Top 20 product, accelerate revenue growth which drives future profits in spite of temporary lower EPS, grow Jack's Flight Club, profitable subscription revenue and develop Travelzoo META with discipline. Now Christina will provide a quick update on Travelzoo META and Jack's Flight Club.

We continue to work on the production of the first Metaverse travel experiences. They will be browser-enabled. As stated in previous earnings calls, we are conscious of developing Travelzoo META in a financially disciplined way. We will provide additional updates in due time. For Jack's Flight Club, revenue increased 20% year-over-year, and the number of premium subscribers increased 13%. We continue to invest in growth; more than half of the revenue earned in the quarter was reinvested into marketing and efficient member acquisition. As with Travelzoo, we expect this to have a compounding effect over the course of the year, resulting in greater deferred revenue and increased profitability. I'm now handing over to the operator for questions for Jeff, Holger, and me.

Our first question comes from Theodore O'Neill from Litchfield Hills Research. Please go ahead. Your line is open.

Thank you very much and congratulations on the strong quarter and positive outlook. My question is regarding the recent discussions in the media about foreign travelers being hesitant to visit the U.S. I'm curious how you perceive this in terms of changes in travel behavior from Europe, Canada, and other places outside the U.S.

Hi, Theo. Yes, we are hearing this from our travel suppliers. For us, as we said earlier, our travel enthusiasts are very flexible with destinations. 91% say they travel wherever they find a great offer and a great deal, so they simply travel to other destinations. So while this is, for sure, a trend in the industry, for us, it's not a negative because our members are very flexible. In fact, they love to travel to new destinations.

Thanks very much.

Our next question comes from Michael Kupinski from NOBLE Capital Markets. Please go ahead. Your line is open.

Thank you. North America performed better than Europe in the latest quarter. I was wondering what was the driver of the dynamic of that? Was it domestic travel or international travel? And if it was international travel, was that due to the dollar? Or were there other factors at play there?

Look, Michael, in global groups like ours where we operate in different markets, there are just natural fluctuations. So I wouldn't oversee that. The consolidation doesn't really give a full picture. When you look into market-specific numbers, for example, Germany had a very strong quarter. Revenue was up double digits year-over-year, very different from last quarter, as you might recall. The U.K. was slightly lower in comparison to a very strong Q1 that we had last year. So we just have these natural fluctuations. And we believe that Europe revenue will also catch up in its growth year-over-year in the following quarters.

Got you. And just as a quick follow-up. I know the numbers, you had a very solid quarter. I was just wondering, though, that the gross margins were a little lower than I expected. Can you just talk a little bit about the impact of the gross margins? Are those affected by the company's effort to develop its subscription business? Or are there other things at play in the quarter?

We had a few opportunities in Q1 to acquire distressed travel products from suppliers at discounted prices, which enabled us to create strong Club Offers. This strategy helped us attract new members and made it easier to convert Legacy Members to Club Members. We had to categorize this as cost of revenue. Additionally, customer service saw a slight year-over-year increase, which is understandable since there were more inquiries at the start due to the influx of Legacy Members signing up for club membership. We expect this to normalize over time, but it was higher in Q1 compared to last year.

Great. Thank you. Congratulations.

Our next question comes from Patrick Sholl from Barrington Research. Please go ahead. Your line is open.

Hi. Good morning. Could you discuss the member acquisition process? Specifically, I'm curious whether the main factor driving consumers to become members is a particular deal you're offering, or if it's influenced by other aspects of your marketing strategies?

Sure. I can take that question. We are definitely seeing that our Club Offers and various travel offers are the biggest draw for converting people into Club Members, but we have a whole suite of benefits that ties to the club membership, including premium access, giveaways, and other things like that. So I think the main driver is the club offers right now, including in our member acquisition efforts. But we do have quite a robust membership offering.

Okay. And then just to maybe drill in on the topic earlier on the changing travel dynamics. Could you talk about how that affects some of your efforts to source deals in certain markets?

Travelers and consumers, in general, are becoming a bit more hesitant, particularly in the U.S. in the last 30 days because we all know a lot is going on. So they are a bit hesitant. But as we know from experience and as we saw in the last 30 days, the lower demand enables us to capture very strong offers from travel suppliers because ultimately they want to fill their hotels, airline seats, and cruise cabins. I spoke a few minutes ago about distressed inventory. So these are opportunities that make our offering stronger and that stronger offering, in turn, attracts more travel enthusiasts to become members of the club.

Okay. Thank you.

Our next question comes from Ed Woo from Ascendiant Capital. Please go ahead. Your line is open.

Yes. Thank you for taking my question. My question is just like there's less demand for people to come into the U.S. Are you seeing the same dynamics for people in the U.S. to travel internationally? Is there less demand for that as well?

We see the first but not the second. So yes, we see a bit of hesitation, particularly among Canadians. Canadians' interest in coming to the U.S. has decreased a lot, but we are not seeing it the other way around. So Americans still love to travel to Europe.

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

Sure. Thanks, Ed.

Our last question comes from Steve Silver from Argus Research. Please go ahead. Your line is open.

Thanks, operator, and thanks for taking the question. So it looks like you guys became very aggressive over the course of the quarter in repurchasing shares. It looks like as the stock price corrected along with the broader market. I'm curious as to your thoughts on the balance sheet and the company's capacity and appetite to continue buying shares if the markets remain volatile over the near term.

Steve, the opportunity was very attractive last quarter. Since we are confident in our business and we had a lot of cash, we increased our share repurchases. Going forward, we expect the cash balance to increase again. First, because we collect membership fees at the beginning of the subscription period. And second, the business is profitable and cash flow positive with relatively fixed operating expenses. And as you heard, we're quite confident right now in our member acquisition activities, so we now have a better opportunity to invest in member growth than we had maybe a year ago, and that's where we would like to allocate the positive cash that the business is generating.

Great. Holger, thanks for the color.

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.

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

This concludes today's Travelzoo first quarter 2025 earnings call and webcast. You may now disconnect your lines at this time, and have a wonderful day.