Travelzoo (TZOO) 2019 Q4 法說會逐字稿

Hello, everyone. Welcome to the Travelzoo Fourth Quarter 2019 Financial Results Conference call. (Operator Instructions) 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 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 archived 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 Chief Executive Officer, Holger Bartel; and its Chief Accounting Officer, Lisa Su. Lisa will start with an overview of the fourth quarter 2019 financial results.

Thank you, Jimmy, 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.

The first slide on Page #3 provides financial highlights. In the fourth quarter, revenue for the quarter was $26.9 million. In constant currencies, revenue was consistent year-over-year. However, in nominal terms, revenue was $164,000 less year-over-year. Our diluted loss per share for the quarter was $0.05. Certain onetime expenses and a higher tax provision recorded in Q4 caused the EPS to go negative.

On the next slide, on Page 4, you can see cash flow from operations was up and operating income was positive. We would also like to highlight growth in new Travelzoo members accelerated in Q4 when compared to last year. New member growth was 18% higher.

Slide 5 details our revenue by business segment. Revenue in North America was $16.2 million, a year-over-year decrease of less than 1%. Revenue in Europe was $9.1 million, a year-over-year increase of 2% in nominal terms and an increase of 3% year-over-year in constant currencies. Revenue in Asia Pacific decreased year-over-year from $1.8 million to $1.6 million. It was a smaller decrease than in previous periods. In Q4, we believe we made very good progress with our important goal of reaching profitability in Asia Pacific. After restructuring in Q4 2019, fixed costs are expected to be substantially less going forward.

On Slide 6, we would like to highlight the positive performance in our core businesses in North America and Europe. Continued strong performance of our core business is masked by our development business in Asia Pacific. In our core business, revenues, operating income and EPS grew in 2019, and operating margins in these businesses are running at an annual rate of 16.2% (sic) [16.1%]. Earnings per share from North America and Europe for the trailing 12 months were at $1.02. On a consolidated level, operating losses from Asia Pacific result in much smaller profits and margins. Please also keep in mind, operating losses from Asia Pacific are currently not used to offset taxable income in North America and Europe. This results in a high effective tax rate on corporate earnings, which would decrease as losses in Asia Pacific shrink.

Slide 7 shows something we believe is very important for our future success. Increasing revenue and higher margins allow us to grow EPS while investing and creating more visibility for Travelzoo. We want to continue growing Travelzoo's following among consumers. There are still many people who have not heard about us yet.

The next few slides cover detail of our revenue for each of our 3 business segments. Slide 8 shows North America revenues from the Travel category increased 1% year-over-year to $13.4 million. The Local category decreased 7% year-over-year to $2.8 million.

Turning to Slide 9. Europe revenue increased from $9.1 million (sic) [$9.0 million] to $9.3 million. In constant currencies, the Travel category grew 5% year-over-year as a result of an increase in revenue from our new vacations product. Revenue from the Local category decreased 5% year-over-year.

On Slide 10, you see Asia Pacific revenue was $1.6 million, down from $1.8 million in the prior year period. We believe that this is not a trend.

Slide 11 shows the cost of revenue and operating margin. Because of Asia Pacific, our overall operating margin decreased to 3.5%. Cost of revenue as a percentage of revenue slightly increased to 10.7% year-over-year.

Slide 12 presents our operating expenses by segment. In North America and in Europe, operating expenses increased primarily because of 2 factors: number one, special marketing initiatives, including a TV advertising campaign with partner, Deutsche Bahn, in Germany; one-time HR related expenses. Operating expenses in Asia Pacific increased primarily due to onetime restructuring expenses.

Slide 13 shows productivity of the organization remains consistent.

Moving on to Slide 14. We ended the quarter with an increased cash balance of $19.5 million. Looking forward, we expect the following. Travelzoo is a countercyclical business. We have seen several times in our operating history when occupancy rates of travel suppliers are decreasing, Travelzoo does better. For Q1, for the Travelzoo business, we are expecting some advertisers to delay inclusions into Q2. However, we currently see this effect fully offset by the additional revenue contribution of the highly profitable Jack's Flight Club. For Q1, we currently forecast consistent or growing revenue. For the year 2020, we expect revenue growth and EPS growth to be driven primarily by Jack's Flight Club. We plan to update investors as we have better visibility on how fast Jack's Flight Club can be introduced to all Travelzoo members.

Now Holger will provide an update on our strategy for 2020 and how we want to create more shareholder value.

Thank you, Lisa. As you can imagine, I receive many questions about the impact of a possible slowdown of the global economy and decreasing occupancy rates of travel suppliers. We know Travelzoo is a countercyclical business. When occupancy rates of travel suppliers are down, Travelzoo does better. Declining occupancy rates lead to more aggressive discounting in the marketplaces. This allows Travelzoo producers who find travel deals -- and that's what they do best, to find even more compelling deals for our 30 million members. And the content is becoming more attractive for them. Travel suppliers want their occupancy rates to go up, and Travelzoo is very good at that. Our members are affluent. 45% of them earn over $100,000 a year. 86% have passports and they respond to the price discounts. Hotels love spending money at Travelzoo because we are not a take-rate company in general. This leads to high returns on capital with high-quality guests that spend money.

In January, we acquired a majority stake in Jack's Flight Club, a highly profitable, fast-growing subscription service that informs consumers about airfare sales. In the investor presentation, please turn to Slide 16. Jack's Flight Club offers a free subscription as well as premium service for which members pay between $40 and $60 annually. The subscribers are primarily in the U.K. Management is excited about this acquisition. We believe it might have a big positive impact on Travelzoo's consolidated financial results in 2020 and beyond. After the acquisition, on January 13, the existing Jack's Flight Club business alone is projected to contribute additional 5% revenue growth and an additional $0.20 in EPS in 2020.

Please turn to Slide 17. Our strategy will be to leverage our global reach and introduce Jack's Flight Club to up to 30 million Travelzoo members. Each new Jack's Flight Club member will bring more profitable, high-quality subscription revenue. The chart on the right shows how contribution to operating profit will be driven by the number of premium subscribers. We cannot see at this time how many Travelzoo members we can successfully introduce to Jack's Flight Club. We know their service is strong for consumers, and we will provide investors an update in our next earnings conference call.

Now back to the operator.

(Operator Instructions) Our first question comes from Michael Kupinski with NOBLE Capital Markets.

I have a couple of them. First, I know that you indicated that you're countercyclical. But obviously, with this coronavirus, we are seeing even some companies restrict nonessential travel, including some from Silicon Valley and then in New York, specifically. Can you just kind of give us a sense of what you're seeing in terms of travel plans and consumers? Are you seeing any particular impact related to it or any particular markets or countries that might be responding to the issues about coronavirus?

Yes, Michael, Europe is more affected right now than North America. As I said, we see advertisers postponing inclusions. But ultimately, the travel companies, they need to drive business. They want people to take trips. So when occupancy rates or load factors for airlines are down, and that might be the result of businesses canceling or restricting nonessential travel, that's ultimately good for us because that means more empty airplanes, more empty hotel rooms, more offers, more deals for our members. And while we see certainly an impact in Q1, we believe that over the rest of the year, this will benefit our company and allows us to grow.

Got you. And then can you give -- I guess, you're saying you're seeing an impact in Q1. Is it just that they're delaying travel? Or -- I'm just trying to understand what you mean by that.

Yes. Advertisers are delaying advertising agreements. So an advertising agreement includes certain offers that they want to promote. And right now, they are just delaying it rather than canceling it.

Got you. And then can you give me a little bit more details about Jack's Flight Club, it sounds like a great acquisition. Have you provided full year revenues and contribution margins for that? And is there any particular seasonality that we should -- I would assume that there might be some. But being a subscription business really is quite interesting. And you indicated that you're going to provide us details in the next quarter. But is there anything else that you can provide us in terms of the attributes and the demographics, the premium subscribers, how many -- of the premium subscribers, how many trips do they book a year? What may be some ideas about what a premium subscriber looks like at Flight Club?

Yes, a lot of questions, Michael. At this point of time, the information that we provided in the earnings presentation is all the information we want to provide. But you might have noticed that when you look at Jack's Flight Club paying subscribers, premium subscribers, they had 110,000 at the end of 2019. And just 6 or 7 weeks later, we have already grown to 126,000 premium subscribers. So we are really excited about the impact that we can make on this business with having 30 million loyal Travelzoo members around the world.

And then just turning to Asia real quick. Can you give us a sense of what you expect the contribution margins might be once -- it sounds like you're getting Asia fixed. But can you give us a sense of where you think those margins might grow to?

So as we said earlier, and as Lisa explained, in Q4, we had increased expenses. In 2020, we expect expenses going down as a result of this restructuring, which was primarily in Japan and in Taiwan. We also made some changes in China. That's really all that we can say right now. Also, in Asia Pacific, our -- what we are seeing right now outside of China, is that in Australia, Japan, we don't actually see a lot of impact from the virus situation, less than I would have expected. And in China itself, we are publishing our Top 20 again. We are promoting offers there and we also see Chinese members who book these offers.

Our next question comes from Steve Silver with Argus Research.

I was hoping if you could provide some thoughts about the landscape for additional material acquisitions across the global tech travel media industry. Looking at the Jack's acquisition, it would seem like companies that are growing subscription businesses almost doubled year-over-year, carrying operating margins over 80%. Those kind of companies would be in extremely high demand and really spark a more competitive acquisition market. So just trying to get your thoughts on that and the prospects for additional deals of that nature moving forward. And given the parameters of Jack's business, congratulations on getting that deal done.

Yes. You're absolutely right. Subscription businesses are very attractive. We see that with a lot of the technology companies like, for example, Microsoft, Adobe, how the valuation has gone up once they started switching to subscription revenue. So we are really excited about Jack's Flight Club. And we will certainly also explore whether we can build certain elements of a subscription business within our Travelzoo member base.

Our next question comes from Ed Woo with Ascendiant Capital.

My question is more on the impact by geography. Obviously, it looks like Asia has been impacted first, and now Europe and North America. Is that what you're seeing in your business as well?

Absolutely. We are seeing Asia already starting to rebound. So as I said, in China, we are publishing Top 20 again. We actually also see members in Europe and North America booking trips to Asia. We still see members in North America booking trips to Europe. So it's not that everybody just is stopping to travel. In North America, the impact is relatively minor right now, I would say, primarily related to trips to Europe. But Ed, as you know, this situation with the virus changes every day. And we have to see what happens in the next few weeks.

Great. And then going -- a follow-up on your comment about how some of these advertising deals are being pushed from Q1 to Q2. What's the general view of your customers, these travel providers? Are they really seeing it just as more of a temporary blip? Or do you think that there's actually more concerns out there due to an uncertainty?

Look, ultimately, Ed, deals are motivating consumers to travel. We all know that the media is communicating very strongly regarding this virus situation, maybe some of it is exaggerated. People have fear right now. But people are traveling and people will get over this. As I said before, when we look back at 9/11 and we will look back at the financial recession, in the periods right after, our business was doing very, very well. We had high operating margins of 15% and more in these periods. So I think while in the short term, yes, we are seeing postponements of advertisements, in the long run, over the course of 2020, I think we will benefit.

Great. And then touching back on your M&A. Obviously, you guys have a very good acquisition with Jack's Flight Club, does it mean that you guys are probably going to be taking a look at more opportunities out there?

Right now, we haven't seen any changes really in the competitive landscape. But I believe that more M&A activity will certainly be coming up. Established players will always look to grow and we will continue to look for potential companies that are interesting for our business.

Our next question comes from James Goss with Barrington.

This is Pat on for Jim. I was wondering if you could maybe talk about maybe some more recent comps with prior epidemics in terms of how that's -- those have affected consumer behavior. I mean I guess there aren't many comps to go with but just anything you guys have seen historically.

Pat, very good question. We are not spending a lot of time right now to analyze a lot of data in detail. So sorry, I cannot provide you a lot of information. Our focus right now really is to work with our travel partners, how can we assist them in this period, how can we assist the cruise industry, how can we assist the airline industry to drive more business and to actually create benefits and assistance to them in this period.

Okay. I will now turn the call back to Mr. Holger Bartel.

Great. Thank you, ladies and gentlemen. This concludes today's teleconference. You may disconnect your lines at this time, and have a nice day.