Travelzoo Q2 FY2025 Earnings Call

Good morning, and welcome to the Travelzoo Second Quarter 2025 Earnings Call. 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 differ 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 this conference call will be made available on the company's Investor Relations website at www.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, I'm stepping in for 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 Q2 revenue was $23.9 million, which is up 13% from the prior year. In constant currencies, revenue was $23.5 million, up 12% from the prior year. Operating income, which we as management call operating profit, decreased as we invested more in member growth. Q2 operating profit was $2.1 million or 9% of revenue, down from $4 million in the prior year. Let me explain the rationale for our significant increase in marketing expense, which lowered EPS. Slide 5 shows a favorable payback on the acquisition of new Club Members that we were able to achieve. On the left side, you see that the average acquisition cost for a full paying Club Member was $28 in Q1 and $38 in Q2. On the right side, you see that we get this money back right away. The member pays, in the U.S. case here, immediately their $40 annual membership fee. Additionally, we generated $18 in revenue from transactions in the same quarter. This immediate payback doesn't even consider an increase in advertising revenues and future membership fees and other revenues. Now Slide 6 shows as a reminder that with subscription businesses, membership fee revenue is recognized ratably over the subscription period, but the acquisition costs are expensed immediately when incurred. Slide 7 shows the effect. While we have an immediate payback, the impact on earnings and EPS is different. Higher member acquisition expenses, coupled with only a portion of revenue recognized in the quarter, reduced EPS this quarter. In the case of Q2, that effect was a reduction of $0.13. On Slide 8, you can see that revenue growth came from all segments. With favorable ROI on member acquisition in the U.K., we invested heavily there. Jack's Flight Club revenue increased by 33%. Operating profit decreased in both our North America and Europe segments, but increased slightly in our Jack's Flight Club segment. On Slide 9, we break down our categories of revenue, advertising and commerce, membership fees, and other. Advertising and commerce revenue was $20.9 million for Q2 '25. Revenue from membership fees increased to $3 million. Membership fees have started to drive significant revenue growth. Next year, we expect them to account for about 25% of revenue. On Slide 10, you can see that our GAAP operating margin was 9%. In Q2 '25, acquiring more Club Members has the effect of lowering GAAP operating margin. Still, given the currently favorable ROI, we will continue to further grow the number of Club Members to bring Travelzoo into high-growth mode. Slide 11 shows that investments in Club Members occur in all key markets. Over time, we expect margins to return to previous levels or even exceed them. On Slide 12, we provide information on non-GAAP operating profit as we believe it better explains how Travelzoo's management evaluates financial performance. Q2 2025 non-GAAP operating profit was $2.4 million, that's 10% of revenue, compared to non-GAAP operating profit of $4.8 million in the prior year period. Slide 13 provides information about the items that are excluded in the calculation of non-GAAP operating profit. Please turn to Slide 14. As of June 30, 2025, consolidated cash, cash equivalents and restricted cash was $11.2 million. Cash flow from operations was $1.3 million. We reduced merchant payables by $2.4 million and repurchased 172,088 shares. Now looking ahead, for Q3 2025, we expect year-over-year revenue growth to continue. We expect revenue growth to accelerate as a trend in subsequent quarters as membership fees revenue is recognized ratably over the subscription period of 12 months as we acquire new members and as more Legacy Members become Club Members. Over time, we expect profitability to substantially increase as recurring membership fees revenue will be recognized. In the short term, fluctuations in reported net income are possible. We might see attractive opportunities to increase marketing. We expense marketing costs immediately. Now I turn the discussion over to Holger.

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 Club Members. Travelzoo members are affluent, active, and 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. Today, I would like to share a bit of information about the Travelzoo Club membership. Please turn to Slide 16. Travelzoo is becoming the place where the world's travel enthusiasts get together. Membership allows them to live their life to the fullest, and it comes with an array of benefits, most importantly, Club Offers that are only available to them. Slide 17 and 18 provide some examples of Club Offers. From unique experiences like cooking with a Michelin-star chef in Tuscany, coupled with an amazing price, to a luxury escape to the Maldives in an overwater villa or an adventure in Iceland, Club Offers provide outstanding value and make us, travel enthusiasts, get up and go even more. As Slide 19 shows, worldwide complementary lounge access in case of flight delays is another popular benefit among Club Members. Slide 20 provides more information about Travelzoo members. Travelzoo is loved by travel enthusiasts, who are affluent, active and open to new experiences. Moving to Slide 22. It provides an overview of our management focus. We are working on: grow the number of paying members and accelerate revenue growth by converting Legacy Members and adding new Club Members; add new benefits to the paid membership; retain and grow 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's profitable subscription revenue; and develop Travelzoo META with discipline. Now Christina will provide a quick update on Travelzoo META as well as Jack's Flight Club.

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 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 33% year-over-year, and the number of premium subscribers increased 15%. The increase in revenue is driven primarily by investments in the growth of premium subscribers over the past few years and the increase in the price of the membership fee, which was implemented in Q2 of last year. We plan to continue to invest in growth, especially now as we have even more runway to do so. I'm now handing over to the Operator for questions for Jeff, Holger and me.

Your first question comes from Theodore O'Neill with Litchfield Hills Research.

I'm trying to understand a little more clearly the dynamics of the profitability going forward. And I'm thinking about this Slide 7 here with the net impact in the quarter being a loss of $0.13. So when you talk about profitability improving over time, does that mean that the acquisition costs go lower or the revenue goes higher or both of those things are occurring?

Theodore, Slide 7 looks at one specific quarter. It looks at Q2. So in Q2, we had marketing expenses, actually, membership acquisition expenses of $2.7 million. And then the slide shows the revenue that is specifically generated from the members that we acquired in Q2. What you see there is that in quarters going forward, so in Q3, Q4, we will continue to generate revenue from these, but we will not have expenses to that cohort of new members that signed up. Now in Q3, we will sign up new members, so there will be new member acquisition costs for these new members, but we will have the positive impact from members that we acquired in Q1, Q2, and even at the end of last year, which will contribute revenue growth in form of membership fees. So, coupled together with all that revenue that is coming in from members that were acquired in the past, that is what's driving overall profitability going forward in the next few quarters and then more so next year.

Okay. My other question is about the Club Offers. I have the press release from July 17 about the offers and I’m curious about the frequency of these. Do you expect these offers to be released monthly, quarterly, or what is the anticipated cadence for these offers?

There are several per week, there are many per week, usually a few dozen per week. We do not issue a press release for every new Club Offer. The press releases just show an example of some offers that we released over that period.

Your next question comes from the line of Michael Kupinski with NOBLE Capital Markets.

You stated that you invested in acquiring subscribers. And while I see the marketing expenses went up, it seems like the cost of revenues also went up significantly. I was wondering if you can address the cost of revenues in the quarter.

Sure, Michael. We had a few opportunities again to purchase distressed inventory, distressed travel products from suppliers with a highly discounted price. And that allowed us to create very strong Club Offers, and you heard that they are very important to our members. So that, in turn, is what we then leverage to attract new members. And it also makes it easier to convert Legacy Members to Club Members. And to properly classify these expenses, we had to put them into cost of revenue.

Got you. And so as we kind of look towards the second half of the year, should we look for more normalized or normalized levels? Or how should we look at that, given that this seems like it was more of a one-time opportunity? So can you kind of just give us what might be ongoing?

It really depends on the opportunities that we see since the travel industry in general, particularly hotels, are seeing a little bit weaker demand. I would expect that we will continue to see these opportunities.

Okay. And then I guess, in terms of the favorable dynamics in terms of the investments in marketing spend, is that something that we should model going into the second half of the year? Are those favorable dynamics still evident as we go into the third quarter?

Well, look, Michael, as we explained, the payback is very, very attractive for us. So essentially, I give someone $28, $38, and right away, they give me $40 or $58 back. I would do that as much as I can. So the question is probably what stops us from doing more of that. And let me explain to you, what stops us from that is our cool head. Of course, we will only do it as long as the payback is favorable. So as long as we can keep that acquisition cost at $40 or below, and we actually hope we can even lower it further as we gain more experience, we will continue to invest in member acquisition. We would be foolish not to do so. So in essence, the market somehow will drive how much we can spend. And that's why it's very difficult to predict for the next couple of quarters, how much we will effectively spend on member acquisition. If the conditions are the same, if we can continue to see that very attractive payback, we will continue to invest even if it affects in the very, very short-term, EPS, but I'm sure you will model this out. And as you then move into next year and you see all this revenue coming in from the new members that we acquired this year because the revenue gets prorated over the next 12 months, then we will finally see the very, very positive impact of the members we are acquiring now.

It appears that the focus on acquiring subscribers, tell me if I'm wrong, but it seems like it was focused in Europe? Can you talk a little bit about the strategy there, particularly about your European strategy?

It was both. Actually, we acquired even more Club Members in North America. You just noticed that in Europe, we reported a loss. So one might wonder why was there specifically a loss in Europe this quarter. And the answer is simply that member acquisition in the U.K. went extremely well. Members, consumers were very attracted to our model. We have a good brand there. Our offers are strong. So we were able to acquire Club Members there at a very attractive price. And so we put more money into the U.K., and that's what drove the income in Europe lower than it was last year.

And my final question, Holger. Can you talk about the prospect of maybe a premium subscription level? I know that you talked in previous calls about the prospect that the $40 annual fee is seemingly pretty low given the value that you have for your membership. And I was just wondering if you had given us some thought about the rollout of more of a premium subscription level and whether or not that might be for 2026 or maybe out in 2027?

Good idea, Michael. We are not looking at it right now. We want to keep things simple. So we will go with this one tier. However, you are right. From conversations that we have with our members, we see that our membership fee is probably too low. And for 2026, we will evaluate by what extent we would like to increase it, if so.

Your next question comes from the line of Patrick Sholl with Barrington Research.

I had another question on the subscriber acquisition spending. Are you essentially saying that you would limit how much you are willing to pay on SAC to that annual membership fee? And then just in terms of like the benefits for the members, if we think of maybe a growth contribution for the membership fee, I guess how should we maybe think about how that nets out versus some of the benefits, obviously, excluding the benefit of being able to access and purchase the deals that you present to them?

So Pat, what I meant is that if effectiveness and the ROI of member acquisition is what will limit our activity to acquire new Club Members. If our acquisition cost to acquire new Club Members in the U.S., for example, was way higher than $58, we would obviously slow down. We would maybe even discontinue investing in certain channels that we use to acquire new members. So that's what I meant. As long as the payback is positive, then we have no reason not to invest because even from a cash perspective, the $38 is mostly what we paid to advertising channels, be it Meta, Google or some others, while the $40 is something that comes in from the member right away. So even on a cash perspective, there's no limitation on how much we could do. So answering your second part, when I speak with members, I meet with them a lot. They value different benefits differently. The #1 thing why they love to be members of Travelzoo is because, as we say, they are travel enthusiasts. They love to go to new places. I met a couple that went to an Italian lake in Italy, they said, 'We had never even heard of it. But Travelzoo has told us about it. It sounded so exciting. We just decided to go. We just came back and we booked already another trip.' So that's what the Travelzoo Club is all about. And others really appreciate these benefits like free lounge access for flights. In fact, we had one member who already registered over 50 flights over the next few months for this benefit. So even people who travel very frequently see such a good value in being a Travelzoo member because of that.

I understand that the cohort of subscribers from a year ago was much lower, but I am curious about what you have learned regarding subscriber retention and how your retention efforts have been performing.

The majority of members, Club Members that we have right now, became Club Members at the end of 2024 because they were Legacy Members. They were members who have been traveling members for a long time, and they were excluded. They now have their membership until the end of the year. So we only will start having really good and reliable data on renewal rates starting at the beginning of 2026, unfortunately.

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

Yes, congratulations on the subscriber growth. My question is about what you are observing in the U.S. and European travel industries. You mentioned it was a bit soft. Have you seen any changes, is it getting worse, or has it stabilized?

Ed, there's not much difference right now between North America and Europe. As you've noticed, flight prices are decreasing. Airlines are not flying empty, and hotel prices are also lowering, which suggests a slight drop in demand. This situation allows us to create strong offers. For instance, the Club Offers provide excellent value, and we are leveraging the evolving travel industry to our advantage.

Great. So you did mention that when it is a little bit weaker in the hotels and travel suppliers need to fill in their rooms. Have you noticed any change in consumer behavior? Have you noticed maybe your high-end spenders trading down or spending less?

No, we have not heard that from our members. Our members are actually quite affluent. And from all the conversations and meetings we have had, we haven't heard that they would be trending down. But they are Travelzoo members, so it allows them to go to very luxurious places and incredible experiences at prices that are much better than what other people are paying. So that, by effect, allows them to do more with less.

Great. My last question is, considering your conversations with travel suppliers, do you think people view this situation as a minor issue, or are there concerns about weakening travel trends as we move into the second half of the year and possibly into 2026?

Right now, everyone is thinking quite short term because the whole environment is a bit uncertain. I'm sure people don't know what's happening in the U.S. with the political administration and so forth. So no one is really making any long-term predictions.

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.

Sure. Dear investors, thank you so much for your time and support today, and we look forward to speaking with you again next quarter.

This concludes today's Travelzoo's Second Quarter 2025 Earnings Call and Webcast. You may disconnect your lines at this time, and have a wonderful day.