Q1 2024 Travelzoo Earnings Call

Participants

Lijun Qi; Acting Chief Accounting Officer; Travelzoo

Holger Bartel; Global Chief Executive Officer; Travelzoo

Christina Ciocca; Chairman of the Board, General Counsel, Corporate Secretary, Head of Global Functions; Travelzoo

Michael Kupinski; Analyst; Noble Capital Markets Inc

James Goss; Analyst; Barrington Research Associates Inc

Steve Silver; Analyst; Argus Research Corp

Ed Woo; Analyst; Ascendiant Capital Markets LLC

Presentation

Operator

Thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Travelzoo first quarter 2024 earnings conference call. (Operator Instructions)
Thank you. I would now like to turn the conference over to Lijun Qi, Principal Accounting Officer. You may begin your conference.

Lijun Qi

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 site at travelzoo.com/ir.
Let's begin with slide number 4. Fellows with revenue, operating profit and member count all increased year over year. Our consolidated Q1 revenue was $22.0 million, up 2% from $21.6 million in the prior year. In constant currencies, revenue was $21.8 million, an increase of 1% year over year. Operating income which way as management core operating profit increased 19% year over year. Q1 operating profit was $5.6 million or 25% of revenue, up from $4.7 million in the prior year. As of March 31, 2024, we had $31.0 million unduplicated members compared to $30.5 million as of March 31, 2023.
Slide 5 shows that revenue growth in our Europe segment more than offset slight delay decline in North America.
On slide 6, we break down our categories of revenues, advertising, membership fees and other advertising revenue increased 1% year over year to $20.9 million from the prior year period. Revenue from membership fees increased 16% year over year to $1.1 million from the prior year period. On a consolidated level, we expect the revenue from membership fees to grow over time during 2024 membership fees have been waived for legacy Travelzoo members.
Slide 7 shows an example of membership fee revenue recognition. Revenue from membership fees is recognized ratably over the period of the subscription member acquisition cost. On the other hand, I recognize in full at the time of the expense.
On slide 8, you can see that our GAAP operating margins increased to 25% in Q1 2024.
Slide 9 shows that in North America, the GAAP operating margin remained high at 31% for Q1 2024.
On slide 10, we provide information on non-GAAP operating profit as we believe it better explain how Travelzoo's management evaluates financial performance. Q1 2024 non-GAAP operating profit was $6.0 million that's 27% of revenue compared to non-GAAP operating profit of $5.5 million in the prior year period.
Slide 11 provide information about the items that excluded in the calculation of non-GAAP operating profit.
Please turn to slide 12. We maintained a solid cash position even after repurchasing 400,000 Travelzoo shares during the quarter as of March 31, 2024. Consolidated cash, cash equivalents and restricted cash was $16.9 million, an increase of $476,000 from December 31, 2023, temporarily merchant payables, which are future payments that we have to make to partners for involuntary from Redeem decreased by $2.8 million over the same period.
Slide 13 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 relatively low in the foreseeable future, higher revenues would adjust increase operating margin for Q2 2024. We expect continued growth in revenue year over year, albeit at a slower pace than in 2023.
We also expect for Q2 2024 higher profitability year over year. We recognize membership fee revenue ratably over the subscription period. Legacy Travelzoo members as of December 31, 2023 exempt from the fee during 2024. Therefore, we do not anticipate generating membership fee revenue from these members before 2025.
Now I attended this question over to Holger.

Holger Bartel

Thank you. And as usual, we will continue to leverage Travelzoo's Global Reach or trusted brand and strong relationships with top travel suppliers to negotiate more exclusive offers for members in times of large 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 4 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% say they are open to new destinations and travel ideas. We are 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. We want to leverage 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 profitable subscription revenue and develop travel to meta with discipline.
At this point, I'd like to turn over to Christina for an update on both Qix Flight Club and travel through meta.

Christina Ciocca

Thank you all gave in Q1, Jack's Flight Club subscription revenue increased 16% year over year to $1.1 million. The number of premium subscribers increased 11% year over year in 2024. We want to keep up this momentum with continued investment in member growth, including in new markets like Canada, further refine Jack's Flight Club, strong value proposition and optimize marketing.
Now I'd like to speak about travel do matter. We are making progress with the production of the first metaverse travel experience. It will be browser enabled. I've stated in previous earnings calls, we are conscious of developing travelers eMeta in a financially disciplined way. We will provide additional updates in due time.
I'm now handing over to the operator for questions for holder at leisure and me, Bill, we will now begin the question and answer session.

Question and Answer Session

Operator

(Operator Instructions)
Michael Kupinski, Noble Capital Markets.

Michael Kupinski

Thank you and thanks for taking my questions. I was wondering if you could talk a little bit about Jack's Flight Club, where is the growth coming from? Is it coming from mostly North America in terms of the number of subscribers and then of that growth, how many of those new subscribers are actually paid subscribers? And I was just wondering if you can kind of give us a little color on the the growth there?

Christina Ciocca

Sure. I can take that question. And we have been investing more into member acquisition in the US specifically over the past quarter and year. And so a lot of the growth is coming from the US, but we still see significant member acquisition in the UK is our largest market and continues to be our largest market. So we're starting to see the US creep up a bit more to be a larger proportion of our paying members. And in general, we have been increasing our premium subscriber numbers year over year as we said and it.
Yes, I think that proportion as it's becoming a larger proportion of our free members. But and we don't disclose the exact number of the premium subscribers at this time.

Michael Kupinski

And next question is in terms of Europe versus the United States or North America, and obviously you had some disparity in the performance. And was just wondering what is driving the growth in Europe first? And then what what do you see happening in the United States? And maybe if you could just give us some color on the current market environment in both continents?

Holger Bartel

Sure. Look, Michael, we said that Europe is catching up after COVID, a little bit more slowly than North America. That's exactly what we are seeing now we are still seeing good growth in Europe. We're not happy that revenues in North America came in lower this quarter than last year. But look, advertising revenues always fluctuate and there's different different reasons.
Sometimes offers from advertisers are not that strong. We don't feel comfortable recommending them to our members, then we lose some advertising revenue. But look, overall, we do not want to compromise on content quality and also quality. That's most important to us. Sometimes advertisers reduced their spend temporarily or in put it on hold.
And so we had that we had a couple of advertisers, partners that are revamping their website changing them. So they put their advertising campaigns on hold temporarily while they are changing their strategy. But that's why we are now transforming to add subscription revenue to the revenue mix because this will increase revenues overall and also make them more stable because subscription revenue is something that will not fluctuate as much from once quarter two.

Operator

James Goss, Barrington Research.

James Goss

Okay, thank you. And just to go on a little with that holder so the reason for the slippage in North American revenues was fewer deals being advertised to the client base. And that's primarily the reason for the North American revenues slippage?

Holger Bartel

What I said, Jim, it's a whole bunch of reasons and they all have together. And that's why advertising revenues fluctuate. And that's why revenues came in lower in North America than the previous year. But as I said, there's a few different reasons. Sometimes it's advertising partners. Could you just put deal campaigns on hold for a quarter or two. So as I said, there's lots of different reasons.

James Goss

Okay. I think as a guidance also plan to better profitability again in the second quarter and I think believe in both North America and Europe that I didn't mention revenues above. Are you thinking revenues are still going to be fairly sluggish, particularly in North America in the current quarter?

Holger Bartel

Our press release and leisure one on S.E.T. I believe that we are expecting in Q2 revenues to also grow versus the prior year, but not as quite the same read as we saw in 2023.

Operator

Steve Silver, Argus Research.

Steve Silver

Good morning and thanks for taking my question as well on Olaroz, hope to talk a little bit about the balance sheet, it looks like the balance sheet is continuing to make improvements, and it looks like the company might be on the verge of reclaiming a net positive cash position compared to the merchant payables as early as next quarter.
And you mentioned that the company did buy back shares in the most recent quarter. Just trying to get your current thinking on the use of cash in a home in an environment where the company is well-funded. I'm just trying to get a sense as to whether the mix will start to shift towards using capital for some growth initiatives like Meta. I'm just trying to get your overall thoughts in terms of use of cash as the bit as the balance sheet continues to improve?

Holger Bartel

Yes, Steve, we are happy with the improvement in the balance sheet on merchant payables are probably now at a level where they will will remain quite stable over the next few quarters, which should be positive for us operating cash flow. So we expect this to go higher over the next few quarters.
Now use of cash to be used in the last year on some of it for share repurchases, it was attractive. The share count has gone down quite a bit. Are we, of course, always looking at opportunities to acquire whether it's parts of businesses like we acquired a couple of times, a membership business from other companies was looking to see if there are opportunities to acquire competitors that are not doing that well. And lastly, we're in this transition now to a club model with a paid membership. And we also believe that at some point of time, we will increase our marketing spend MEMBER acquisition spend in order to drive that growth.

Steve Silver

Great. Thank you for the extra color.

Operator

Ed Woo, Ascendiant Capital.

Ed Woo

Yes, thank you for taking my question and congratulations on the quarter. My question is, as we're approaching the summer travel season, what are you seeing out there both in Europe and the U.S. in terms of the consumers as well as the suppliers are how they feel summer travel season is going to be?

Holger Bartel

No large changes at versus what we have seen last year. If anything, I can probably report that what we are hearing from travel partners is that while last year was the year where in particular Americans wanted to venture out, wanted to travel more internationally wanted to go to more exotic destinations, and they are now seeing on increased demand for staying closer to home.
So in general, more interest in vacations in the US are less interested in exotic vacations. And also, we are hearing that January people are looking for vacations and trips where they can just relax and recover. And so I would say 2023, you seem to have been the year of activity and churn. Now 2024 may be one where we are seeing more Trintech's to vacation.
Speaking on trips that that are just really allowing people to recover relax and come back home are refreshed one thing we are seeing by the way with our paid membership, and this is of course, one of the reasons why we moved to a club model is now that we are indeed what the industry is calling a closed user group, which means not everyone is a Travelzoo member only.
Those who are joining were PR. Travelzoo members offer some travelers were not open to the public any longer. It's not sufficient to just entered e-mail address and purchase that offer. Now that we're in that state, we are seeing that we can source better offers. We can source offers from companies that we didn't work with before why is debt on since you know, quite a bit about the travel industry, as you probably know that price parity is a very important issue, particularly for hotels, particularly for cruise lines.
So hotels don't want to show a different price, a lower price, a better offer to the public. Now, however, that Travelzoo is a club and only those who are in can see these offers, we are obtaining better offers and that in return is making the Travelzoo membership more valuable, more attractive. And that's going to be the component of what's going to drive to growth in membership and paid memberships going forward.

Ed Woo

Greg, just going a little bit further into the summer travel season. Have you noticed any changes in people spending, whether they're spending less traveling, fewer amount of days. Any macro issues? Are you seeing any of that either in Europe, U.S. or Europe?

Holger Bartel

No, we have not tapped. It seems to be pretty similar to 2023, both in North America as well.

Operator

Michael Kupinski, Noble Capital Markets.

Michael Kupinski

Yes, just a couple of quick follow-up call questions here of the I was just wondering in terms of what your experience has been so far in terms of the conversion over to the membership fees of your registered members. Are you seeing any variance from what you had in before? And at this juncture, do you have an estimate of what how much of those registered registered members will convert to on membership subscription fee.

Holger Bartel

So all is going according to plan. And according to our expectations on new members since 12 since January first, 2024, new members that joined have to pay the advertising fee sorry, the memberships, the membership fee, and we see members coming in at a rate that exceeds what we expected and the ones that joined before January first, 2024, as we said, don't have to pay in 2024. We have a plan for how we are on converting them or at least a portion of them from this complete status into paying members.
We certainly don't want to we give up our entire advertising business, so we have a plan for that. You will see at the end of the year, what we're going to do. And then we also, as you saw in today's presentation, we are now breaking out revenues into advertising, membership fees and other are because we want to give, you know, the analyst as well as investors an opportunity to track the progress in how our paid membership is growing.
And then as I said just responding to add, we are now creating offers that are stronger. We need to communicate and we are communicating to our existing members. The legacy members that the offering is getting stronger because that's going to be an important component to turn them into team members next year.

Michael Kupinski

In hunger to that end, it was a little surprising to see sales and marketing expenses down in the quarter. I was just wondering that was an anomaly or if you can just kind of give us your thoughts of what affected that in the first quarter and or if that is a good run rate that we should be using for 2024? That's all I have. Thank you.

Holger Bartel

Very good observation, indeed. Yes, we didn't spend as much on marketing and acquisition in Q1 versus previous quarters. We expect this to change and go up in subsequent quarters.

Michael Kupinski

Okay. Thank you.

Operator

James Goss, Barrington Research.

James Goss

I thank you. I have a follow-up as well. And in terms of reaching new potential paying subscribers, I wonder if you might talk a little about the marketing plans you have underway, like how you're doing it to where what tools you're trying to use, if I might provide a little color along those lines.

Holger Bartel

So it's a very wide wide range of marketing activities, mostly focused on online. But I really cannot go into all the details, Jim, because we lose quite a few tactics. Some of it's around our some of it is around specific offers some of it around communicating to nonmembers what the benefits are of joining. So all of it is really focused on communicating to those who are not yet part of the club get once you join the club of travel enthusiasts, you can expect to obtain extraordinary offers and benefits in its worth. It's worth investment.

James Goss

Okay. And the other the other one, I think you might have alluded to this little with Michael's question, but and you do have plans underway to tried to address the current individuals who are getting your e-mails but are choose not to subscribe and a year you'll be rolling Arie providing us with more information later in the year. Is that what you're suggesting?

Holger Bartel

Yes, we have a plan for that. It's not going to be a change from one day to the next where things will change drastically. We have a plan for how we are converting them into paying members, you can just get that right.

James Goss

Thank you. Okay. Sure.

Holger Bartel

Thank you very much.

Operator

That concludes our question and answer session. I will now turn the call over to Holger Bartel for closing at the investors.

Holger Bartel

Thank you again for your time and support, and we look forward to speaking with you again next quarter. And have a great day.

Operator

This concludes today's conference call. Thank you for your participation, and you may now disconnect.