Earnings Call Transcript - TZOO Q4 2023

Operator, Operator

Hello, everyone. Welcome to the Travelzoo Fourth Quarter 2023 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 Forms 10-K and 10-Q and other SEC filings. Unless required by the 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 travelzoo.com/ir. Now it is my pleasure to turn the floor over to Travelzoo's Global CEO, Holger Bartel; its Chair, General Counsel, Head of Global Functions, CEO of Jack's Flight Club, Christina Ciocca; and its Finance Director, Lijun Qi. Lijun will start us with an overview.

Lijun Qi, Finance Director

Thank you, operator, and welcome to those of you joining us today. Please 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 #4. Travelzoo's revenue, operating profit and member count all increased year-over-year. Our consolidated Q4 revenue was $21.1 million, up 14% from $18.6 million in the prior year period. In constant currency, revenue was $20.8 million, an increase of 12% year-over-year. Operating income, which we refer to as operating profit, increased 25% year-over-year. Q4 operating profit was $4.5 million or 21% of revenue, up from $3.6 million in the prior year. As of December 31, 2023, we had 31.1 million unduplicated members compared to 30.4 million as of December 31, 2022. Slide 5 shows that strong revenue growth continued in our Europe segment and at Jack's Flight Club. On Slide 6, we go into more detail about the revenues and the operating profit of our two largest business segments, North America and Europe. North America Q4 segment revenue increased 5% year-over-year to $13.8 million from the prior year period. Operating profit in North America was $4.0 million in Q4 compared to an operating profit of $4.2 million a year ago. Europe Q4 segment revenue increased 34% year-over-year to $6.3 million from $4.7 million in the prior year period. Europe had an operating profit of $832,000 in Q4 compared to an operating profit of $42,000 in the prior year period. On Slide 7, you can see that our GAAP operating margin was 21% in Q4, up from 19% year-over-year. Slide 8 shows that in North America, the GAAP operating margin remained high at 29%. On Slide 9, we provide information on non-GAAP operating profit as we believe it better explains how Travelzoo's management evaluates financial performance. Q4 2023 non-GAAP operating profit was $5.2 million, that's 25% of revenue compared to non-GAAP operating profit of $4.8 million in the prior year period. Slide 10 provides more information about the items that are excluded in the calculation of non-GAAP operating profit. Please turn to Slide 11. We maintained a solid cash position even after repurchasing 600,000 Travelzoo shares during the quarter. As of December 31, 2023, consolidated cash, cash equivalents, and restricted cash was $16.4 million, a decrease of $3.0 million from December 31, 2022. Comparably, merchant payables, which are future payments that we have to make to partners when vouchers are redeemed, decreased by $10.7 million over the same period. Slide 12 and 13 detail our revenues by business segment. The North America business segment saw a year-over-year revenue increase of 5% to $13.8 million. This was driven by revenue from travel. Revenues from local entertainment experiences are still expected to recover from the pandemic. Turn to Slide 13. The Europe business segment saw a year-over-year revenue increase of 34% to $6.3 million. This was driven by particular strength in travel. Slide 14 shows our revenues compared 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 contained in the foreseeable future, while revenues are expected to grow. Higher revenues will increase the operating margin. For Q1 2024, we expect continued growth in revenue, albeit at a reduced pace from 2023. We expect a high cash flow from operating activities and high profitability. We plan to continue our outstanding share repurchase program. In December 2023, we announced the introduction of a membership fee for Travelzoo beginning January 1, 2024. Existing members as of December 31, 2023, are exempt from the fee during 2024. Therefore, we do not anticipate generating membership fee revenue from existing members before 2025. Now I turn the discussion over to Holger.

Holger Bartel, CEO

Thank you, Lijun. Q4 concluded a strong year for Travelzoo, with each quarter achieving year-over-year revenue growth, profitability, and positive cash flow from operations. We will continue to leverage Travelzoo's global reach, our trusted brand, and strong relationships with top travel suppliers to negotiate more exclusive offers for our members. It is in times of significant increases in travel prices that Travelzoo is most valuable for consumers. Travelzoo members enjoy high-quality travel experiences that represent outstanding value. With more than 30 million members, 8 million mobile app users, and 5 million social media followers, Travelzoo is loved by travel enthusiasts who are affluent, active, and open to new experiences. Slide 15 provides more information about Travelzoo members. 91% of them say they are open to new destinations and travel ideas. We are indeed the club of travel enthusiasts. Slide 17 provides an overview of what management and our global team are focused on. We want to grow the number of Travelzoo members, leverage our strong existing relationships with top travel suppliers, and add new relationships to negotiate more exclusive offers, utilize higher operating margins to increase EPS, grow Jack's Flight Club's revenue, and develop Travelzoo META with discipline. At this point, I'd like to turn over to Christina for a quick update on Jack's Flight Club and Travelzoo META.

Christina Ciocca, Chair, General Counsel, Head of Global Functions, CEO of Jack's Flight Club

Thank you, Holger. Jack's Flight Club had a strong year in 2023, closing Q4 with a 29% increase in revenue year-over-year and a 21% increase in premium members. In 2024, we are excited to maintain this momentum with continued investment in member growth, including in new markets like Canada, implementation of an inflationary price increase for new members, and further refinement of our value proposition, all of which we believe will help us find better marketing efficiencies and grow profitably. Now I'd like to speak about Travelzoo META. Exciting news from Travelzoo META is that we are close to producing the first Metaverse travel experience. It will be browser-enabled. We expect to bring that experience along with more new immersive travel experiences to founding members of Travelzoo META on the new Travelzoo META app. 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. Now I'm handing over to the operator for questions for Holger, Lijun, and myself.

Operator, Operator

Your first question comes from the line of Michael Kupinski from NOBLE Capital.

Michael Kupinski, Analyst

Congratulations on a successful fourth quarter and a strong 2023. I have a couple of questions. You mentioned that in 2023 there was pent-up demand for travel following the pandemic. What dynamics are you observing, particularly in North America, where growth has been slower compared to Europe, which is performing well? Can you explain the differences between those two regions?

Operator, Operator

Michael, please go ahead now.

Michael Kupinski, Analyst

Were they able to hear my questions? I was asking about the pent-up demand for people traveling. In 2023, we had this pent-up demand following the pandemic. What are we seeing now compared to North America and Europe? What are the dynamics at play here?

Christina Ciocca, Chair, General Counsel, Head of Global Functions, CEO of Jack's Flight Club

Holger, is your line working? Sorry Michael...

Holger Bartel, CEO

Hello, Michael. So it looks like there was a technical difficulty, but I could hear you. Okay. Speaking about the industry, it looks like 2024 will be another strong year for travel, not quite as strong as 2022 and 2023. As we said, the pent-up demand is slowly ebbing. We are hearing from our partners that in North America, bookings from the partners are good. Europe made a little bit less and that might have to do with the wars that are going on in Ukraine and in Gaza, Israel. So overall, probably still a positive year overall. We are seeing stronger growth in Europe, as you saw growth in North America slowing down a bit, but in general, should be a similar year to the previous ones.

Michael Kupinski, Analyst

So do you anticipate that North America is going to pick up the pace a little bit? Or do you think that you're anticipating that North America will lag Europe again in 2024?

Holger Bartel, CEO

Europe is slightly catching up as we expected. So we are very happy to see that. North America indeed was a little bit slower in Q4. The reason for that was that a couple of advertisers were just becoming a bit more cautious because of the wars that I just spoke about. I think this is just a temporary situation. So we will see how the rest of 2024 will develop. We are optimistic.

Michael Kupinski, Analyst

Got you. And then it seems in 2023 that you throttled back a little bit on your sales and marketing spend. I think it was like 45% of revenues, it was 47% in 2022. Can you talk a little bit about your outlook for sales and marketing spend in 2024?

Holger Bartel, CEO

In Q4, our marketing spend tends to be a bit lower because we don't see it as a good quarter or environment for advertising travel offers. For 2024, I cannot really comment much because we have now moved to a paid membership model. So I am really not able right now to predict what we will see in 2024.

Michael Kupinski, Analyst

I got you. In general, do you anticipate that this will adversely affect margins as you kind of move towards a more paid subscription model? What are your thoughts in general?

Holger Bartel, CEO

I really cannot comment right now. Maybe next quarter we will know more. But right now, I just can't comment on that.

Michael Kupinski, Analyst

Okay. Fair enough. I believe I already know the answer to this question, but I'm going to ask it anyway. The merchant liabilities decreased significantly, around $12 million, and remained fairly stable, similar to the cash. Can you provide some insights into the current dynamics that explain this? I understand you have mentioned previously that some of these merchant liabilities might not be utilized, but I would appreciate it if you could elaborate on the situation.

Holger Bartel, CEO

Yes. Thank you. We’re very happy with the improvements of the balance sheet. And we expect that merchant payables will normalize around the level where we are right now and where they have been before the pandemic.

Operator, Operator

Your next question comes from the line of Jim Goss from Barrington Research.

Jim Goss, Analyst

I was wondering what sort of experience you've had so far since you've gone through a paid model. Have you been attracting sign-ups? And do you have any expectations for the take rate for the existing subs becoming paid subscribers, and how you might treat the existing subs who choose not to? I think you've talked in the past about maybe giving them occasional emails or something of that nature, but I wonder if you might have fleshed out that strategy at all.

Holger Bartel, CEO

Jim, yes, we do see, of course, sign-ups of paid members, members who are paying the membership fee, and the number is a bit higher than what we anticipated. So we're happy about that. But in general, it's just too early for me to provide a lot of comments. I hope I can provide more next quarter, but right now, I'm just not able to provide a lot of comments on this.

Jim Goss, Analyst

Okay. I noticed Jack's Flight Club had a little bit of a step-up too. I wonder if you might talk about your promotional plans for continuing that process and gaining some greater subscriber base for JFC.

Holger Bartel, CEO

Yes, we're happy how this develops. Christina can answer your question.

Christina Ciocca, Chair, General Counsel, Head of Global Functions, CEO of Jack's Flight Club

Sure. So in 2024, we're looking to add a couple of additional promotional activities in sales. We typically have one in January and one in July and one in November, and we are thinking to add one or two additional to see how that does over the course of the year. We try to obviously space them out so we don't cannibalize ourselves with each of the sales. We're also, as I mentioned, looking to expand into new markets. Our first will be Canada, and we're looking forward to seeing the metrics and numbers for that new market. We anticipate that we'll find better marketing efficiencies there, which will allow us to grow well and grow profitably.

Jim Goss, Analyst

Okay. And maybe my final question. To the extent that you now have a subscription plan for both the core service and Jack's Flight Club, is there any thinking about potentially creating a dual or kind of like a combination membership where someone might be able to get, say, a discount on both of them and then gain access to both and then you pick up subscriber base that way?

Holger Bartel, CEO

Yes, it’s a great idea, Jim. We don’t do it yet, but we are looking into it for the future. Very good idea, of course.

Operator, Operator

Your next question comes from the line of Steve Silver from Argus Research.

Steve Silver, Analyst

Congratulations to everybody on the strong results in Europe and the return to profitability there. It's great to see. My question is also about the technical difficulty back now, Holger, you had mentioned a little while ago that there might be some near-term softness, particularly in North America as a result of the conflicts in Ukraine and the Middle East. Just trying to get a sense of the timing of your announcement of the membership model. I know you’ve spoken about it over the past several years since the Jack's Flight Club acquisition was first announced, that the company would be looking to move towards a subscription model over time. But given the fact that there is just a lot of turmoil in certain regions around the world, I was just wondering if there's any insight you could share in terms of the thought process in moving to the membership fee now as compared to possibly just seeing how the global situation unfolds over time.

Holger Bartel, CEO

Yes, Steve, one is not really related to the other at all. In fact, as I said, we saw a couple of advertisers becoming a bit more cautious because of the wars in Ukraine and Israel. However, we still see strong demand and interest from our members in general in traveling, so it didn't really affect our decision. And we're very happy that we made the decision to move to this new paid model so far. We are really fine with the timing; I didn't see any connection between the two.

Steve Silver, Analyst

Okay. That's helpful. And just one more. I know you had mentioned the share repurchases and that you expect that to continue moving forward and just the concept that you've spoken about over time in terms of META being grown very diligently and with discipline. I'm just trying to get a sense, as META does ramp up, do you expect to be able to grow META to where you want it to go while maintaining modest investment levels? Or would you expect that at the appropriate time, there would be more resources put into META to eventually grow that unit to where you want it to be?

Holger Bartel, CEO

It’s the first. We have always said we want to manage it and grow it financially in a prudent manner, and we will continue to do so. We are generating good cash flow, so that’s why we are planning to complete our share repurchase program.

Operator, Operator

Your last question comes from the line of Ed Woo from Ascendiant.

Ed Woo, Analyst

Congratulations on the quarter. Two areas in the travel industry that are growing really rapidly are alternative accommodations as well as bookings for activities. Can you talk about how you guys are trying to be active in that space?

Holger Bartel, CEO

It was not an area that we actually did much in the past, but now that we are on a paid membership model, we are speaking with some companies about partnerships in the future. So we are better positioned now to enter this conversation. So thanks for asking this, Ed.

Operator, Operator

Okay. I'll now turn the call over back to Mr. Holger Bartel.

Holger Bartel, CEO

Dear investors, thank you so much for your time and support today. 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 disconnect your lines at this time. Have a nice day.