Travelzoo (TZOO) 2021 Q2 法說會逐字稿

Hello, and welcome to the Travelzoo Second Quarter 2021 Financial Results Conference Call. (Operator Instructions)

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 not -- made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from the 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 in 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 on the company's 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 second quarter 2021 financial results.

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 #3. 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 4, we wanted to go into more details about our 2 more significant business segments, North America and Europe.

We are showing the revenue and operating income for the last 3 years for Q2. Both of these segments had significant revenue decline in 2020 due to the pandemic, but has now recovered some of those losses. Our North America business segment is at 78% of the 2019 levels, but we are already at almost the 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 operating income.

On Slide 5, Travelzoo has decided to provide information on non-GAAP operating income as we believe it 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 6 provides details on the items that are excluded in the calculation of non-GAAP operating income.

Please turn to Slide 7. 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 $82.1 million, which is an increase of $10.1 million from $72 million as of March 31.

Slides 8 and 9 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 the 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 reduction of 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 approximately $16.5 million. We also expect for Q3 to remain profitable.

Now Holger will provide additional information and insights.

So let's go to Slide 12. And let's remind us that we have 30 million members, 6.8 million mobile app users and 4 million social media followers. We are a brand that's beloved by travel enthusiasts who are affluent, they're active and they're open to new experiences.

And I would also say they are influencers and they are leaders when it comes to travel. Vaccination rates among Travelzoo members in all the countries where we operate is roughly twice as high as the country average. And a whopping 87% of U.S. members tell us we are ready to go on vacation. So that's great. And in the U.S., 71% of our members say that Travelzoo influences their travel destinations because they trust us.

The next slide gives an overview of what management and our global team is 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 see and 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 Instructions) Our first question comes from Michael Kupinski of NOBLE Capital.

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. 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?

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 is just a lot of the legal political restrictions on where and when they can travel.

And as soon as that stops or gets better, the members will travel. And I think -- and our business in Europe will recover as well like we've seen in America.

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?

Generally, it's getting better. It just seems that Europe, particularly the European Union and in the U.K., have difficulties just coordinating common strategy. And I think that will happen in the next few months. So as that happens, then things will get better. But in general, restrictions in Europe are becoming less as well, just not as eagerly as it happened in the U.S.

Got you. And in terms of the gross margins 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?

Part of what influences gross margins is voucher sales, and voucher sales make a smaller portion of revenues this quarter than in previous quarter. We think that will continue to go down. So that's what's boosting the gross margins.

Got you. And 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 will recover?

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. I was wondering, can you give us some thoughts on Jack's Flight Club at this point and how you see revenues recovering there?

The service is actually increasing -- so the service is 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, that will change in the next couple of quarters.

And in the U.S., we're also thinking of maybe including the subscription or part of the subscription in a paid membership that we are looking to introduce at some point of time in the U.S.

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 $82.2 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?

Yes, that's why we are holding the cash because at some point of time, we have to pay some of it out to the merchants. And we are seeing increased redemptions of the vouchers that we have sold in the last year.

So I think the cash position likely will still increase for a couple of quarters, then it should flatten out. It really depends on how quickly our members are redeeming the vouchers.

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

I can actually speak to a little bit of this. With the merchant payable, not all of those vouchers will actually get redeemed. We also are able to recognize breakage in Europe. And so right now, with all of the merchant payable, you can't really expect that we're going to pay all of that out.

And with all of those vouchers, they don't expire until 2022 and 2023. So we would not expect to have to pay out all of the merchant payable over the next year.

Got you. Lisa, do you think that -- so you're feeling fairly comfortable with the cash balance at this point. And as you kind of go forward, you're looking at your free cash flow should be improving. So from that standpoint, you would expect that the cash position would be higher than the merchant payables as you go in the subsequent quarters, I would assume?

Yes, that's what we would expect.

Our next question comes from Jim Goss of Barrington Research.

First, one clarification on one of Michael's questions. With the -- within Europe, is it -- does the European Union predominate in terms of regulations? Or will it be on a country-by-country basis and somewhat more uneven?

And on a related basis -- on a related note, will a return to travel would be more in terms of those restrictions than consumer attitudes? Is that what I'm reading from you?

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 there. And they just like to coordinate Europe wide. But it's not always often that easy.

And as I said, the appetite among the members to travel in Europe is the same. In fact, I just looked at some numbers we received from a new survey yesterday and Spain is up there at the same level as the travel enthusiasm we see in the U.S. So they are equally ready to go, and we are also seeing that they want to do more special trips, longer trips. They're willing to spend more. So those are all good signs for 2022 travel.

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 were available in each?

I can't really comment much on the delta variant broadly. I don't know more than what's in the news that you will find yourself everywhere. But it -- we haven't heard it from our members that it's significantly impacting their decisions right now. I think the fact that our members are twice as vaccinated just shows that they just want to go somewhere.

And a vaccinated person is more comfortable traveling than a one -- non-vaccinated one. So it's just a sign of the enthusiasm and the interest of traveling again soon.

Okay. 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?

The interest of our members in vouchers is still very strong. That hasn't really changed over the last 4 or 5 quarters. It's roughly the same every quarter. But 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 are seeing, our 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 the #1 -- their #1 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. They can use it later. And that's exactly what these vouchers are offering, and that's why they've become so popular. And I still see them to remain quite popular over the next couple of quarters.

Okay. And one final thing. I think Lisa mentioned that the operating expense would be a similar percentage of revenue in the Q3 and going forward. And I was wondering about that because it seems that you talked last year in the depth of the pandemic about cutting back on some of the fixed costs, and people costs especially.

And that 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 with the operating leverage from maintaining those cost levels as revenues improved. Could you talk about that dynamic a little bit, either of you?

I think what Lisa meant was that roughly as a percentage of revenue, it 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 will still increase. That hasn't really changed.

The one thing we could state 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, clearly, as this slide that you are referring to talks about, it shows that as revenues go up, operating expenses are not expected to go up at the same pace, which makes our business, overall, more profitable for the future.

Our next question comes from Steve Silver of Argus Research.

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 little bit of a contraction in the overall member count, mostly in Europe. Just trying to get a sense as to as -- even if Europe is a little slower to rebound just in terms of operations, given the fact that the vaccination rate across the globe is progressing the way it is, would you expect that these lost European members over the last quarter, or even in the last couple of quarters, would be quicker to bounce back really as the hold of the vaccination program expands globally?

Yes, Steve, it's clearly not a trend. That's what we saw this quarter. We also have to have -- 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, and we also see that subscribers who didn't really read the newsletters in the last 6, 8 months, 12 months, they are coming back and they are clicking.

In fact, the click rates on the newsletters that we are sending out this quarter, right now are the highest that we have seen since the pandemic started. So that's one thing.

And the other thing is we're seeing a lot of referrals coming in that might not show up as strongly on the whole number. But it very much increases the amount of people that are actually using us, buying and planning and booking trips. And that's what's shown was the increase in revenues that we have seen this quarter.

Okay. Great. And then the press release mentions 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 at Jack's or whether it's just subject to the same conditions that we just discussed?

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

Our next question comes from Ed Woo of Ascendiant Capital.

Yes, congratulations on the quarter again. As we're hearing about some big travel destinations having some issues of capacity, particularly in either air travel or rental cars. How much of that has affected your business? And do you think that that's going to be holding you back or holding the travel industry back from getting back to full growth again?

Look, it's quite simple. Yes, you are right, some destinations are quite busy. Other destinations are almost empty. We, in fact, had one of our employees just come back from a trip to the Maldives and he reported he was almost the only person on the island.

So -- and that's where exactly we come in. Look, our members and -- the 30 million members we have, they are not a typical consumer. They are really our biggest asset and that's what makes us strong because these members tell us that they trust Travelzoo. They trust Travelzoo to tell them where can you still find value.

So if I compare these numbers, look, why don't you think about Tahiti or Fiji instead of going to Hawaii where prices are higher? Why don't you think about going to places like Croatia and Madera? As you heard, 71% of the members are willing to go to different destinations just because we tell them about it. And that's the important role we play for the travel industry in this recovery.

We help these members who are very spontaneous. They're very flexible. We help them find places where they can find good deals. And at the same time, we have the destinations, the hotels, the travel suppliers to actually exactly get the people there where we want them, and not to the places where there are already enough people coming.

So that's, in essence, what Travelzoo is about and why I think we will play an important role in this recovery of the travel industry this year and next.

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

Thank you, ladies and gentlemen. Thank you so much for the time and support today. 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 now disconnect your lines at this time. Have a nice day.