Earnings Call Transcript - TZOO Q2 2021

Operator, Operator

Hello and welcome to the Travelzoo Second Quarter 2021 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 the 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 archive recording of this conference call will be made available on the Travelzoo Investor Relations website at travelzoo.com/ir. Now, it is my pleasure to turn the call over to Travelzoo's Global CEO, Holger Bartel; and its Chief Accounting Officer, Lisa Su. Lisa will start with an overview of the second quarter 2021 financial results.

Lisa Su, Chief Accounting Officer

Thank you, operator, and welcome to those of you joining us today. Please open 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 number three. Here you can see that our Q2 revenue was $19.1 million. We see continued improvement in our business. We expect revenue to continue trending upward for the rest of 2021. We also returned to profitability in Q2 with an operating profit of $3.5 million. We had a slight decline in members from 31.8 million at the end of March, down to 31.3 million at the end of June. On slide four, we wanted to go into more details about our two more significant business segments; North America and Europe. We are showing the revenue and operating income for the last three years for Q2. Both of these segments had significant revenue decline in 2020 due to the pandemic, but we have now recovered some of those losses. Our North America business segment is at 78% of the 2019 levels, but we are nearly equal to 2019 operating income. Our Europe business segment has been slower to recover and is at only 48% of 2019 revenues, but has narrowed the gap on the operating income. On slide five, Travelzoo has decided to provide information on non-GAAP operating income as we believe that better explains how Travelzoo evaluates performance. This slide shows the non-GAAP operating income which improved year-over-year from a loss of $2.1 million to an operating profit of $4.9 million. We believe the financial performance of the company is in line with our expectations. Slide six provides details on the items that are excluded in the calculation of non-GAAP operating income. Please turn to slide seven, our continued success in voucher sales keeps pushing the positive development in cash balance. As of June 30, consolidated cash, cash equivalents, and restricted cash were at $82.1 million, which is an increase of $10.1 million from $72 million as of March 31. Slides eight and nine detail our revenues by business segment. When neutralizing FX changes, the North America business segment recorded an increase in revenue of 188% year-over-year and our Europe business segment recorded an increase in revenue of 105% year-over-year. Advertising revenue has picked up significantly compared to prior quarters as advertisers have started coming back to make use of our reach. On slide 10, you can see that the quick adjustment of our cost structure at the beginning of the pandemic has continued and resulted in lower fixed costs. Non-GAAP operating expenses were reduced mostly coming from headcount adjustments throughout the entire organization and from reductions in overhead costs. We expect that our operating expenses will continue to be around the current percentage of revenue in Q2 2021 going forward. In summary, as you see on slide 11, Q2 exceeded our expectations with how quickly revenue has increased from Q1. Looking forward, we expect for Q3 revenue in the range of $20 million to $21 million and for operating expenses and cost of revenues, we expect to approximately $16.5 million. We also expect for Q3 to remain profitable. Now, Holger will provide additional information and insights.

Holger Bartel, Global CEO

So, let's go to slide 12 and let's remind that we have 30 million members, 6.8 million mobile app users, and 4 million social media followers. We are a brand that is beloved by travel enthusiasts who are affluent, active, and open to new experiences. And I would also say they are influencers; they are leaders when it comes to travel. Vaccination rates among Travelzoo members in all the countries where we operate are roughly twice as high as the country average. And a whopping 87% of U.S. members tell us they are ready to go on vacation. So, that's great. In the U.S., 71% of our members say Travelzoo influences their travel destinations because they trust us. The next slide gives an overview of what management and our global team are focused on. Of course, we will seize the exceptional industry opportunities we're having right now for providing our Travelzoo members with exclusive and irresistible travel, entertainment, and local offers and experiences. We continue to offer Travelzoo members flexible and worry-free deals for future travel. That's most important for them right now, and it's a format that's working well. We're looking to grow Jack's Flight Club's profitable subscription revenue, and we're looking to grow EPS and profits as the demand for travel returns. Now, back to the operator.

Operator, Operator

The floor is now open for questions. Our first question comes from Michael Kupinski of NOBLE Capital. Your line is open.

Michael Kupinski, Analyst

Thank you and congratulations on your quarter. A couple of questions. Obviously, you highlighted the fact that North America looks like it's recovering faster than Europe, I was wondering if you can give us your thoughts about Europe and how you see that recovery? Do you think it might kind of start reflecting the recovery as fast as North America? If you can just give us some thoughts on what you're seeing in Europe at this point?

Holger Bartel, Global CEO

So, Michael, the interest among our members in Europe is actually equally strong as in North America. They are ready to go; they are vaccinated; they are looking to plan international trips. What's holding them back right now are just many political restrictions on where and when they can travel. As soon as that stops or improves, the members will travel, and I think then our business in Europe will recover as well like we've seen in America.

Michael Kupinski, Analyst

Are you seeing restrictions being lifted? Or do you see restrictions still being implemented? Or kind of reversing from opening up? I just do you have any flavor of what you're seeing overall?

Holger Bartel, Global CEO

Generally, it's getting better. It just seems that Europe, particularly the European Union and the U.K., have difficulties in coordinating a common strategy. I think that will happen in the next few months. If that occurs, then things will improve. But in general, restrictions in Europe are becoming less, though not as speedily as that happened in the U.S.

Michael Kupinski, Analyst

Got it. And in terms of the gross margins, they were significantly higher than I expected. Can you talk about what drove the gross margins in the quarter and your thoughts on gross margins going forward?

Holger Bartel, Global CEO

Part of what influences gross margins is voucher sales, and voucher sales made a smaller portion of revenues this quarter than in the previous quarter; we think that will continue to decline. So, that's what is boosting the gross margins.

Michael Kupinski, Analyst

Got you. And the Jack's Flight Club looks like it's been adversely affected by flight travel, particularly in Europe, I would assume. Can you give us your thoughts about Jack's Flight Club, how that recovers? And I know that you were thinking about expanding service offerings to Jack's Flight Club outside of just offering flights and other travel-related services and then expanding in other markets. So, I was wondering if you could give us some thoughts on Jack's Flight Club at this point, and how you see revenues recovering there?

Holger Bartel, Global CEO

The service is actually increasing in the U.S., but right now, most of their subscribers are in the U.K. And you're absolutely right; some of the flight restrictions in the U.K. are holding it back. We hope that will change in the next couple of quarters. In the U.S., we're also considering including the subscription part of our service that we are looking to introduce at some point in time.

Michael Kupinski, Analyst

And then let's just talk about your cash position for a second. You have $80.9 million in cash, but your merchant payables are already $2.2 million. Can you provide some color on your thoughts about the cash position and your ability to pay your merchants for the vouchers over the next year? Just kind of give us your thoughts about the cash position as you look out over the next several quarters as well.

Holger Bartel, Global CEO

Yes, that's why we are holding onto cash because at some point in time, we have to pay some of it out to the merchants. We are seeing increased redemptions of the vouchers that we have sold in the last year. So, I think the cash position will likely still increase for a couple of quarters, and that should reflect now. It really depends on how quickly our members redeem the vouchers.

Michael Kupinski, Analyst

But in terms of the cash position being lower than your merchant payables, was that a concern?

Lisa Su, Chief Accounting Officer

I can actually speak to a little bit of that. Look, the merchant payables, not all of those vouchers will actually get redeemed. We can also recognize breakage in Europe. So right now, with all the merchant payables, you can't really expect that we're going to pay all of that out. All of those vouchers do not expire until 2022 and 2023. So, we would not expect to have to pay out all of the merchant payables over the next year.

Michael Kupinski, Analyst

Got you. Lisa, do you think that you feel fairly comfortable with the cash balance at this point? As you move forward, it seems that your free cash flow should improve. From that perspective, you would expect that the cash position would be higher than the merchant payables in the upcoming quarters, I would assume?

Lisa Su, Chief Accounting Officer

Yes, that's what we would expect.

Michael Kupinski, Analyst

Okay. All right. Thank you. That's all I have.

Holger Bartel, Global CEO

Thanks, Michael. Bye.

Operator, Operator

Thank you. Our next question comes from Jim Goss of Barrington Research. Your line is open.

Jim Goss, Analyst

Thanks for the clarification, Michael. Regarding Europe, does the European Union primarily set the regulations, or will it vary by country and be more inconsistent? Additionally, will the return to travel be influenced more by regulations than by consumer attitudes, is that what I'm interpreting from your comments?

Holger Bartel, Global CEO

In the European Union, decision authority for these travel restrictions lies with the country, sometimes even with the state or county as they call it over there. They just like to coordinate it, but it's not always that easy. As I said, the appetite among the members to travel in Europe is just as strong; we received numbers from a new survey yesterday in Spain showing the same level of travel enthusiasm we see in the U.S. They are equally ready to go and we are also seeing that they want to do more special trips, longer trips, and they are willing to spend more, so those are all good signs for 2022 travel.

Jim Goss, Analyst

Okay. And could you provide some insight both in the U.S. and Europe, in terms of the Delta variant and whether that's creating a renewed challenge? And within Europe, I know you said they were quite well-vaccinated; is that also uneven, depending on the country and which vaccines are available in each?

Holger Bartel, Global CEO

Yes, I can't really comment much on the Delta variant. I probably don't know more than what's in the news that you can find yourself everywhere. But we haven't heard from our members that it's significantly impacting their decisions right now. The fact that our members are twice as vaccinated just shows that they want to go somewhere. A vaccinated person is more comfortable traveling than a non-vaccinated one. So, it's just a sign of the enthusiasm and interest in traveling again.

Jim Goss, Analyst

Okay. Thank you. And a couple of other things. Vouchers, I think you talked about them becoming a more important part of your mix as we went into the pandemic. Could you say whether they will sustain that greater relative importance going forward?

Holger Bartel, Global CEO

The interest of all members in vouchers is still very strong; that hasn't really changed over the last four or five quarters. It's roughly the same every quarter. However, as a percentage of overall revenue, it's going down; I think in this quarter, Q2, was probably slightly below 40%. In Q3, as we have seen, the advertising revenues will probably go down to about 30%. But it's still an important element of our business because what the members tell us is their number one factor for making decisions and booking travel is flexibility. And the ability that if something changes, they can change their travel plans, they can maybe go somewhere else, or they can use it later. That's exactly what these vouchers offer, and that's why they have become so popular. I still see them remaining quite popular over the next couple of quarters.

Jim Goss, Analyst

Okay. Thanks. And one final thing. I think Lisa mentioned that operating expenses would be a similar percentage of revenue in Q3 and going forward. I was wondering about that because it seemed that you talked last year in the depths of the pandemic about cutting back on some of the fixed costs and people costs especially. And it seemed that not only would you get a benefit right away in sort of maintaining profitability, but you'd get a continuing improvement in the rate of profitability, but the operating leverage from maintaining those cost levels as revenues improved. Could you talk about that dynamic a little bit, either of you?

Holger Bartel, Global CEO

I think what Lisa meant was that roughly as a percentage of revenue will be the same; it will probably go down a little bit. In absolute terms, as revenues increase, our profits in absolute terms, our operating profit is expected to increase. That hasn't really changed. The one thing we could add is that we'll probably spend a little bit more on marketing going forward. So, that's probably what also has to be considered. But in general, as this discussion refers to, it shows that as revenues go up, operating expenses are not expected to go up at the same pace, which will make our business overall more profitable for the future.

Jim Goss, Analyst

All right. Thank you, Holger.

Holger Bartel, Global CEO

Thanks, Jim. Yes.

Operator, Operator

Thank you. Our next question comes from Steve Silver of Argus Research. Your line is open.

Steve Silver, Analyst

Thank you and congratulations on the strong profitability in the quarter. It's great to see. Most of my questions have been answered, but I had a quick question about the member count. As of the current quarter, I noticed a slight decrease in the overall member count, particularly in Europe. I'd like to understand whether, even if Europe is taking longer to recover operationally, you expect the last European members from the past quarter or the last couple of quarters to bounce back more quickly as the vaccination efforts continue to expand globally.

Holger Bartel, Global CEO

Yes, Steve, it's clearly not a trend. That's what we saw this quarter. We also have to see that consumers have more confidence again in traveling, and now that we see that we are planning to sign up new subscribers. We're also seeing that subscribers who didn't really read the newsletters in the last six, eight, or twelve months are coming back and clicking. In fact, the click rates on the newsletters that we're sending out this quarter are the highest we've seen since the pandemic started. We're also seeing a lot of referrals coming in that might not show up as strongly on the whole number, but it very much increases the number of people that are actually using us, booking and planning trips. And that's what's showing with the increasing revenues that we have seen this quarter.

Steve Silver, Analyst

Okay, great. And then your press release mentioned that the number of members for Jack's Flight Club has remained steady and constant at 1.7 million. I'm just trying to get a sense as to whether there is a catalyst beyond what we just discussed in terms of gaining more attention to the membership with Jack's or whether it's just subject to the same conditions we just discussed?

Holger Bartel, Global CEO

Yes, the same can be said here. It's not a trend. As you heard, it's a clear priority for management to grow that member base that is subscribing to Jack's Flight Club's service.

Operator, Operator

Thank you. Our next question comes from Ed Woo of Ascendiant Capital. Your line is open.

Ed Woo, Analyst

Yes, congratulations on the quarter again. We've heard that some major travel destinations are facing capacity issues, especially with air travel and rental cars. How has this impacted your business? Do you believe this will hinder your progress or the travel industry's recovery to full growth?

Holger Bartel, Global CEO

Look, it's quite simple. Yes, you're right; some destinations are quite busy, while other destinations are almost empty. In fact, one of our employees just came back from a trip to the Maldives and reported she was almost the only person on the island. That's where exactly we come in. Our members and the 30 million members we have are not the typical consumer, and they are really our biggest asset, which makes us strong because these members tell us they trust Travelzoo to guide them to where they can still find value. So, if I can tell these members, 'Look, why don't you think about Tahiti or Fiji instead of going to Hawaii where prices are higher? Why not consider going to places like Croatia or Madeira?' As you heard, 71% of the members are willing to go to different destinations just because we inform them about it. That's the important role we play for the travel industry in this recovery. We help these members, who are very spontaneous and flexible, find great deals and at the same time, have access to destinations without the travel suppliers having to secure the cheaper deal, which is essential for us and our members. So, that's essentially what Travelzoo is about and why I believe we will play an important role in the recovery of the travel industry this year and next.

Ed Woo, Analyst

Great. Well, thank you for answering my questions, and I wish you guys good luck.

Holger Bartel, Global CEO

Sure. Thanks, Ed. Have a good day.

Operator, Operator

I return the call back to Mr. Holger Bartel.

Holger Bartel, Global CEO

Ladies and gentlemen, thank you so much for your time and support today, and we look forward to speaking with you again next quarter. Have a great day.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect your lines at this time. Have a nice day.