Earnings Call Transcript - TZOO Q4 2020

Operator, Operator

Hello, everyone. Welcome to the Travelzoo Fourth Quarter 2020 Financial Results Conference 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 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 Form 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's my pleasure to turn the floor over to Travelzoo's Global CEO, Holger Bartel; and its Chief Accounting Officer, Lisa Su. Lisa will start with an overview of the fourth quarter 2020 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. On the first slide on Page number 3, you can see our Q4 revenue was $12.5 million. We see continued improvement in our business. Q4 revenue was, in our opinion, not indicative of this trend. The revenue for Q1 2021 is expected to grow, and the stabilizing trend also shows in our significant increase in EPS from Q3 to Q4. Starting with Q3 2020, Travelzoo has decided to provide information on our non-GAAP operating income going forward as we believe it better explains how management evaluates performance. Slide 4 shows the non-GAAP operating income, which changed year-over-year from $3.1 million to $547,000. We believe the financial performance is in line with our expectations. Slide 5 provides details on the items that are excluded in the calculation of non-GAAP operating income. Let's continue now to Slide 6. Our continued success in voucher sales keeps pushing the positive development in our cash balances. As of December 31, 2020, consolidated cash, cash equivalents, and restricted cash were $64.2 million. Slide 7 and 8 detail our revenues by business segment. When neutralizing FX changes, the North America business segment recorded a decrease in revenue of 45% year-over-year, and the Europe business segment recorded a decrease in revenue of 72% year-over-year. While revenues from local still stagnated in Q4, advertising revenue picked up compared to the previous quarter as advertisers have started coming back to make use of Travelzoo's reach. On Slide 9, you can see that the quick adjustments of our cost structure at the beginning of the pandemic have resulted in lower fixed costs. Non-GAAP operating expenses were reduced by 47%, mostly coming from headcount adjustments in sales and marketing and process optimization in the company. In summary, as you see on Slide 10, Q4 was in line with our expectations. Looking ahead, we expect revenue for Q1 to be in the range of $14 million to $15 million. For operating expenses, we expect approximately $14.7 million. We expect for Q1 to result close to breakeven or at a profit. Now Holger will provide additional information and insights.

Holger Bartel, Global CEO

Thank you, Lisa. Please turn to Slide 11. As we see vaccination programs progressing and consumer confidence slowly strengthening, our members are becoming more active in responding to deals and buying them. We started seeing this trend, in particular, in the U.S. during the last 2 weeks. We now see the strongest activity from Travelzoo members in the U.S. since March 2020, as measured by user sessions on the Travelzoo site and app. In the U.K., we noticed a spike in purchases in week 8. What happened? Prime Minister Boris Johnson announced a timeline for removal of COVID-related restrictions. We clearly see as soon as the situation improves, consumers quickly wish to travel. We arrive at Slide 12. Travelzoo is loved by travel enthusiasts who look for high-quality deals. Travelzoo members are affluent, active and open to new experiences. 75% say that Travelzoo influences their travel destinations because they trust Travelzoo. We feel that trust will become a much more important competitive advantage of the Travelzoo brand going forward. Finally, on Slide 14, we provide an overview of management's focus. We will expand and seize the exceptional industry opportunities for sourcing high-quality travel, entertainment, and local deals; continue to offer members flexible and worry-free deals for future travel; grow Jack's Flight Club's profitable subscription revenue; and grow profitability as the demand for travel returns. Now back to the operator.

Michael Kupinski, Analyst

Can you talk a little bit about the competitor that exited the market in the U.S.? And how were you able to pick up the 2 million subscribers there? And then how big was the competitor? And what is the potential subscribers that you might eventually pick up? And I have a couple follow-ups.

Holger Bartel, Global CEO

Michael, I cannot comment on this topic today, but we will issue some more information on this when we are ready to do so.

Michael Kupinski, Analyst

Okay. And then can you talk a little bit about the declines in subscribers in Europe and the competitive position there? When do you feel that you will need to step on the investment accelerator to gain subscribers as a result of the mitigation efforts kind of waning of COVID?

Holger Bartel, Global CEO

Sure. The decline of the subscribers in Europe is actually more a result of adding new subscribers a little bit more slowly, as we know, particularly in the U.K. and in Europe, in the European Union, there have been quite a lot of travel restrictions. Businesses are shut down. Unsubscribe rates have actually been lower than in the past. So net-net, we just see a small decline right now because we're not adding as many members as we have done in the past. But once travel resumes and we see clearly the trend in the U.K. picking up strongly, we are planning to add more subscribers and reverse this trend and grow again.

Michael Kupinski, Analyst

Got you. And then if you could talk a little bit about Jack's Flight Club because the revenues seemed a little disappointing to me. I mean a little softer than I would have expected. I know this is a promising new growth vehicle for you. And I was just wondering if you could talk about your plans to accelerate revenue growth there and what you think looking forward we might look for from Jack's Flight Club.

Holger Bartel, Global CEO

Yes. Same here. It's just simply a matter of time. In the Travelzoo business, we are right now offering our members deals for future travel. They have a lot of flexibility. We've been very successful with the vouchers that we've been selling over the last 10 to 11 months. Jack's Flight Club is focused solely on airline tickets. And that's obviously something that takes a little bit longer to come back. But as soon as people are flying more, then I think we will see that revenue grow in the future.

Michael Kupinski, Analyst

Holger, I recall you were planning to expand Jack's Flight Club beyond just airline travel by incorporating other aspects of your business. Has that not yet taken place? What actions are you currently taking to achieve that integration?

Holger Bartel, Global CEO

Yes. Yes, we are doing this when the timing is right. We started introducing Jack's Flight Club to our U.S. members. And we just have to pick the right time when it's good to do. So we expect that to happen in the next couple of months.

Jim Goss, Analyst

First, I'll follow up on Michael's questions about Jack's Flight Club. I was wondering if the challenging situation that caused some write-downs related to it would impact the price you'd have to pay to purchase the rest of that asset? Or is it cast in stone from the first deal?

Holger Bartel, Global CEO

Lisa, do you want to answer this question, please?

Lisa Su, Chief Accounting Officer

Yes. So we have a put call option to purchase the remaining 40% based on if they achieve certain thresholds. At this time, that number is undeterminable. It depends on how the 2021 results come out. But I would expect that that's something that we will discuss later this year. It's not fixed in stone at all.

Holger Bartel, Global CEO

But just to be clear, Jim, the choice is in our hands. So we have the full right to acquire this total 100% of Jack's site though. And then we will consolidate it fully. Right now, we are not consolidating it fully.

Jim Goss, Analyst

Okay. Secondly, regarding staffing. While it's unfortunate to reduce staff, it has positively impacted your cost structure. However, I anticipate that some of those positions may need to be reinstated as you begin to grow again, especially in the sales and marketing areas. Could you provide insights on how this process might unfold and your strategy for reintegrating some of the costs and expenses that have been saved so far?

Holger Bartel, Global CEO

We are not anticipating, Jim, any significant increases in the cost structure this year. Yes, you are right. We will probably increase marketing spend, particularly for subscriber acquisition, but the expenses will be far below pre-COVID levels.

Jim Goss, Analyst

Okay. And finally, I was wondering if there are any key metrics we should be looking at to evaluate resurgence in leisure travel that would impact you domestically or, I guess, in the United States and North America, but also, it would be great to hear some insights in terms of Europe, which seems to have had even more strict border controls. And how you see that market reopening in terms of travel, both within Europe and from Europe to other countries?

Holger Bartel, Global CEO

Yes. It's really about overall consumer confidence. The key metric is likely to be how eager consumers are to return to travel. What we are witnessing, along with others in the industry, supports this notion. For instance, in the U.K., there was a noticeable surge in activity when clarity about travel resumed was provided. Following a speech from Boris Johnson, several companies reported significant revenue increases. Additionally, we are observing a heightened interest in destinations that consumers may not have previously considered, such as the Maldives, Southeast Asia, and unique experiences like safaris. There is clearly a robust pent-up demand for travel, especially for experiences that may carry a higher cost. This trend is encouraging for the entire industry, and particularly for us.

Jim Goss, Analyst

Okay. Am I correct in thinking that the European continent has been more restrictive than certain other regions? Are you anticipating any relief that would allow people to make those choices later this summer or into 2022?

Holger Bartel, Global CEO

U.S. recovered the most quickly. Actually, you see traffic and member interest is already higher than 12 months ago. Next is the U.K., which has accelerated quite a bit since the middle of February. And we expect Germany, Spain, and France to come soon after. I don't think it's a matter of 6 to 9 months. I think the recovery will happen more quickly. And we will see that on the revenue side of Travelzoo as well.

Operator, Operator

Our next question comes from Ed Woo with Ascendiant Capital.

Ed Woo, Analyst

You mentioned that as soon as the travel restrictions are done, that you plan on adding more subscribers. Is that similar to your expectations for revenue growth in terms of you expect to add marketing expenses maybe at the end of this quarter or maybe next quarter to ramp up the subscriber growth?

Holger Bartel, Global CEO

It depends on the opportunity for us. In fact, we have increased a little bit marketing spend this quarter because we are able to acquire in the U.S. right now new members at lower acquisition costs than in the last 12 months or even before COVID. So that's good. And when we see these opportunities, we will take advantage of them.

Ed Woo, Analyst

Great. At least for now, as subscriber costs have been lower or about the same or have increased as things are opening up?

Holger Bartel, Global CEO

Right now in the U.S., they are lower than what we've seen in the past. In Europe, we are not really doing much subscriber acquisition because it's not the right time.

Ed Woo, Analyst

Great. And my last question is, there was a lot of discussion. The rise of alternative accommodations. People don't want to stay in hotels. They want to stay in houses. Have you seen a shift back to hotels as cases have come down? Or do you think it's more of a permanent shift in the way people travel?

Holger Bartel, Global CEO

What we have seen in the U.K. is really a strong interest in domestic travel. Very quickly after, hopefully, in May, the travel restrictions will go away and hotels will reopen. In the U.S., there's more interest in actually going to faraway places and being a little bit more adventurous.

Operator, Operator

Our last question comes from the line of Steve Silver with Argus Research.

Steve Silver, Analyst

A couple from me. First, I noticed that talking about the licensing revenues coming out of Asia, that obviously is just getting off the ground there with the lag. So the Q4 revenues would reflect Q3, which was really just at the beginning of the transaction. I was just curious to know if even directionally, if there's any insights you might have in terms of the rebound of travel in Asia that might just give some sense of the trajectory in that region moving forward?

Holger Bartel, Global CEO

Steve, so as you saw from the previous announcement, we have done license agreements in some of these countries. In Japan, our licensee is reporting that things are recovering, so that's good. And in Australia, Singapore, and Southeast Asia, our activity or the activity level of the licensee is not that great yet. But keep in mind that in Southeast Asia and China, travel is still a little bit more restricted than it is in North America.

Steve Silver, Analyst

Okay. Great. And then last one, given the competition leaving the U.S. market, as you mentioned in the press release, as well as the divestiture of your interest in the WeGo subsidiary. I'm just trying to get a sense as to whether the marketplace has a lot of startup activity going on that might present new opportunities given all the disruption and changes in travel around the world? And whether there might be an opportunity for smaller players to get in or really if just a lot of the larger players are maintaining a dominant share of the market moving forward?

Holger Bartel, Global CEO

We still believe that Jack's Flight Club is a significant opportunity for us. It would be much further along today if the COVID pandemic had not occurred, which paused its development. However, it remains a key opportunity for us moving forward. Additionally, we have noticed Tripadvisor making announcements about subscription programs, which also represents a great opportunity for us. We have been providing valuable services to Travelzoo members with exclusive offers at no cost for many years. Looking ahead, we see potential to implement some fees for members to access some of the excellent services we offer.

Steve Silver, Analyst

Congratulations on the execution in a very challenging year.

Holger Bartel, Global CEO

Great. Thank you so much, Steve.

Operator, Operator

Yes, ladies and gentlemen, thank you for your time and support. And we look forward to speaking with you 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.