Travelzoo (NASDAQ:TZOO) Q2 2022 Earnings Conference Call July 27, 2022 11:00 AM ET
Company Participants
Lisa Su – Chief Accounting Officer
Holger Bartel – Global CEO
Arveena Ahluwalia – Global Director of Travelzoo META
Conference Call Participants
Michael Kupinski – Noble Capital Markets
Edward Woo – Ascendiant Capital
Steve Silver – Argus Research
James Goss – Barrington Research
Operator
Hello, everyone. Welcome to the Travelzoo Second Quarter 2022 Financial Results Conference Call. All participants have been placed in a listen-only mode, and the floor will be opened for questions following the presentation. 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 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 CEO, Holger Bartel; its Chief Accounting Officer, Lisa Su; and its Global Director of Travelzoo META, Arveena Ahluwalia. Lisa will start with an overview of the second quarter 2022 financial results.
Lisa Su
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 number 3. Our Q2 revenues were lower than expected. However, profitability was good. Operating income, which we as management call operating profit was $1.8 million, which is approximately 10% of revenues. Our Q2 revenue was $17.7 million, down 7% from $19.1 million year-over-year. Our operating profit in Q2 was $1.8 million, which resulted in earnings per share of $0.08. Compared to the previous quarter, the number of members remain the same.
On Slide 4, we go into more details about the revenues and operating profit of our two more significant business segments, North America and Europe. North America continues to outperform Europe and the recovery from the pandemic. North America revenue decreased 11% year-over-year but increased 6% quarter-over-quarter. The operating profit in North America was $3.1 million in Q2 compared to $1.7 million in Q1. Europe had revenue growth year-over-year of 5%. Europe had an operating loss of $1.5 million due to increased member acquisition spread in Q2.
As shown on Slide 5, even though revenue was still lower than pre-pandemic revenue levels, the changes that we have made to the business are generating higher operating margins compared to pre-pandemic.
On Slide 6, North America’s business segment reached 25% operating margin, which is the highest it has been in six years, and we think that it can still go higher.
On Slide 7, we provide information on non-GAAP operating profit as we believe it better explains how Travelzoo evaluates performance. This slide shows the non-GAAP operating profit, which was $2.6 million in Q2.
Slide 8 provides details on the items that are excluded in the calculation of non-GAAP operating profit.
Please turn to Slide 9. As of June 30, 2022, consolidated cash, cash equivalents, and restricted cash were $26.7 million. The cash balance reached the expected level as the number of vouchers outstanding has become smaller. Merchant payables decreased proportionately.
Slides 10 and 11 detail our revenues by business segment. When neutralizing FX changes, the North America business segment saw a year-over-year decrease of $1.6 million. The Europe business segment, which we report in U.S. dollars, is negatively impacted by the strong dollar. Yet we saw in Q2 an increase by $700,000 year-over-year, which represents 17% growth. The local business, which consists of advertising from restaurants, bars, and entertainment shows and events remains far behind what it was pre-pandemic.
Slide 12 shows that this pandemic led to a significant reduction of fixed costs, which can be kept relatively low in the foreseeable future, while revenues are expected to grow. For Q3 2022, we currently expect higher revenue year-over-year and also profitability. We continue to see a trend of recovery of our revenue. However, there could be unexpected fluctuations in the short term. During the pandemic, we have been able to lower our fixed costs. We believe we can keep our fixed costs relatively low in the foreseeable future, while revenue is still expected to grow.
Now, I turn over to Holger.
Holger Bartel
Thanks, Lisa. From the perspective of management, Q2 was a good quarter. The company is profitable again and even better, profitability is higher than before the pandemic. We now see that the changes and improvements in efficiencies that we’ve made over the last two years are resulting in higher operating margins. In Q2, when the revenue was a little lower than expected, the company’s operating margin was actually the highest that we have seen in six years. And in North America, the operating margin was already 25%. We believe that revenue will continue to recover and grow.
As you can see on Slide 13, with more than 30 million members, 7 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. The latest survey results for Travelzoo members in the U.S. show that 58% took three or more vacations in 2021, 94% have a valid passport, which compares to 43% of the U.S. population.
Next on Slide 15, I provide an overview of what management and our global team are focused on. We want to increase the number of members and accelerate revenue growth to reach and then exceed pre-pandemic levels, grow Jack’s Flight Club’s profitable subscription revenue, utilize higher operating margins to significantly increase EPS, and launch Travelzoo META.
So at this point, I’d actually like to turn over to Arveena Ahluwalia, who is Travelzoo’s Global Director, Travelzoo META.
Arveena Ahluwalia
Thank you, Holger. I am happy to speak about Travelzoo META, Travelzoo’s new initiative towards a paid subscription-based service in the Metaverse. In today’s update, we would like to address the status and timing of Travelzoo META.
Please turn to Slide 18. Given the newness of this industry, we launched Phase 1 in May in a controlled test environment to a limited set of users. We are deploying learnings from the test into our next phase, which is scheduled to launch in September. We are continuing with our phased approach and test and learn strategy. We will provide updates as appropriate.
The next slide on Page 19 is top categories of value creation in the Metaverse. According to a large consumer survey by McKinsey & Company published in June 2022, virtual immersive travel is the second most sought-after experience in the Metaverse.
Please see the next slide on Page 20. The McKinsey & Company report validates TravelzooMETA strategy. McKinsey & Company found that consumers in the Metaverse are looking to explore and travel digital world. Travelzoo META will allow its members to do so, and therefore, give them the experiences they value the most.
Travelzoo META experiences will be browser-enabled entertaining travel experiences that allow members to interact with and in the Metaverse. Travelzoo META is expected to attract a completely new generation of members, in addition to complementing real-world lifestyle and travel experiences curated by Travelzoo for its existing 30 million members. Being a first-mover is important.
With that, I’m handing over to the operator for questions for Holger, Lisa, and me. Thank you.
Question-and-Answer Session
Operator
Thank you. The floor is now open for questions. [Operator Instructions] Now, our first question coming from the line of Michael Kupinski with Noble Capital Markets. Your line is open.
Michael Kupinski
Thank you for taking the questions. As you mentioned, the revenues were a little lighter, but Holger, I was wondering if you can just give us your thoughts on what caused the softer revenues, were there’s still travel restrictions out there, were most of those lifted? Do you think it’s just consumer behavior, reaction to geopolitical events? Just your general thoughts.
Holger Bartel
Hi, Michael. Yes, revenues were a bit lower than we expected, but not that much. I have to say we had a very strong quarter in Q2 2021. As you know, so the comparison this quarter was tough year-over-year, the first six months, revenues are still up and we expect Q3 and Q4 revenues to be up again quite a bit over the last year. So it wasn’t anything particular. I would say the biggest challenge in Q2 was that, as we all know, airlines and hotels have reduced capacity, they are quite busy. They have reduced capacity because they’re struggling bringing their staff back and training it.
So flights are full. Hotels are full. So towards the end of the quarter, it became a bit more difficult to source deals, particularly from hotels. We saw this continuing in July, but now we clearly see that this is changing. If you look into September, October beyond, it’s very clear. Airlines are slashing their fares already. Hotels are reducing their rates. We certainly expect like many others that some economic challenges will be coming our way, and we believe that will actually be good for us because it makes it easier for us to source deals for our members, but that was a bit of challenge in Q2.
I have to add that the slight decrease in revenue was mostly driven by voucher purchases. You can also imagine if a lot of our members purchased vouchers in Q2 last year. We saw a great deal of redemptions now this year. And while they are redeeming their vouchers, they are not immediately buying new ones. So that’s what’s causing the change. However, our advertising business, completely different is up very strongly versus the previous year.
Michael Kupinski
Okay. Got it. Got you. And then you indicated that your plans are to increase the number of members worldwide. It looks like you had some success in doing that in Europe. What are your plans for North American members? And if you can just talk a little bit about the customer acquisition there. And then Jack’s Flight Club members increased. And I believe was that largely in the U.K.? And what are your current plans to introduce Jack’s Flight Club to the United States market? And then if you could just — another question, if I can. How much did you spend in your — for your customer acquisition in the quarter?
Holger Bartel
So member acquisition, as you said, was up in Europe in Q2 because we saw a good opportunity. In North America, member acquisition costs now in Q3 have come down quite a bit, probably because more people are looking for deals that are turning to a service like ours. So we are growing. We are adding more new members in the U.S. this quarter. And Jack’s Flight Club is growing again as well, yes, but both in the U.K. and the U.S.
Michael Kupinski
Right. Got you. And I — if you can also talk a little bit about the CapEx for this year remaining for the second half and maybe for next year? And then a little bit about the Metaverse strategy. Can you talk a little bit about what your CapEx plans are there? I would assume that while this looks like a great opportunity, there’s always the bleeding edge of the — of being in the new technologies and new services like this. I was just wondering what your thoughts are in terms of how you plan to manage the investment spend for this over the next, let’s say, year?
Holger Bartel
Yes. Sure. Lisa and Arveena, maybe you can jump in here. But let me just explain the way we are approaching the Metaverse opportunity is quite light on the investment side. It’s not an investment in technology that we need to do. We are simply providing a service to the subscribers of that service, and that is something in which we don’t have to invest heavily into technology. But Arveena, feel free to add on here or Lisa.
Arveena Ahluwalia
Thank you, Holger. I am happy to add here. So we are building Travelzoo META strategically using a phased approach in a cost-efficient manner with no significant upfront investments. And it is the phased cost control strategy that allows us to judiciously navigate the rapidly changing Metaverse environment. Also, we will — we are measuring and assessing the performance of each phase and pursuing next steps accordingly. And by using this process of continuous improvement and deploying a robust system of checks and procedures, we are monitoring progress and keeping investments in check.
Operator
Thank you. One moment for our next question. And our next question coming from the line of Edward Woo with Ascendiant Capital. Your line is open.
Edward Woo
Yeah. Thank you for answering my question. In terms of what you’re seeing with some of the price cuts in the fall, have you seen it greater than what it is normally seasonally on a basis? And what are you hearing in terms of, obviously, high inflation impacting the consumer? Are you seeing some of your travel providers noticing a significant slowdown in consumer demand?
Holger Bartel
Hi, Ed. To answer the first question. Well, the decrease is quite significant. Yes, because hotel prices and airfares were up so much in summer. So yeah, it’s — it’s a more significant decrease that you’ve seen in the past. And then with regards to how is inflation affecting the consumer and our members, it’s the same. They are looking for value. Interestingly, our members have not seen — have not said that they want to cut back travel, maybe they take slightly shorter trips. They are looking for better offers. And as I said, they are looking for value. Travelzoo is ultimately about value because we are delivering of– we’re delivering our members really incredible experiences at a great deal. And that’s what consumers are looking for and that’s why we feel it will also become easier for us in the second half of the year to acquire new members, and we will probably see our existing members also more active than in the past few months
Edward Woo
Great. And then just trying to segment your European business versus your North America. Have you noticed any change in consumers in either region or they all kind of acting the same in terms of the reaction to how the inflation is going globally?
Holger Bartel
They behave the same way. I would say we are maybe seeing in the U.K. consumers be a little bit more sensitive to prices than in other markets. But in general, they behave the same.
Edward Woo
Great. Well, thank you for answering my questions, and I wish you guys, good luck. Thank you.
Holger Bartel
Sure. You’re welcome, Ed.
Operator
Thank you. One moment for our next question. And our next question coming from the line of Steve Silver of Argus Research. Your line is open.
Steve Silver
Thank you very much, and thank you for taking my question as well. I guess my question relates to the company’s capital position given that it sounds like you guys saw an uptick in the levels of voucher redemptions this past quarter. Just trying to get a sense of your current thinking of the capital position, just given the fact that the merchant payables are coming down significantly, the cash balance is coming down with that. Just trying to get your thoughts about how the capital position might affect other capital allocation strategies, including the recently announced share repurchase program?
Holger Bartel
Yes, Steve, I’ll let Lisa add some more color. But in short, everything is developing as expected. Cash — the ratio between cash and merchant payables is actually improving quarter-over-quarter. More vouchers are being redeemed, the vast majority of vouchers that have been purchased have now been redeemed or some of them have been refunded. So, yeah, the number of outstanding vouchers on which we have to pay the merchant is decreasing every quarter. And also, we have, in addition to cash, we have some deposits with the credit card processors that will be released in the future. Also, not all of them are paying us. I mean we receive the cash only with a — with a short delay after the transactions are processed. But I guess, Lisa can explain a little bit more.
Lisa Su
Yeah. We would expect that we get some of our long-term deposits along with our accounts receivable in the next six to one year. And so we expect that our cash position will actually improve. We also expect that our working capital deficit will also improve because of that release.
Holger Bartel
So we have quite healthy development of the balance sheet.
Lisa Su
Yeah. Our balance sheet will get much more robust.
Steve Silver
Okay. Great. Thank you so much for the color.
Operator
Thank you. And our next question coming from the line of James Goss of Barrington Research. Your line is open.
James Goss
Okay. Thank you. Couple of things. One, you have been good at controlling G&A and product development costs. Sales and marketing expenses have been higher which is to be expected as you’re trying to grow the business. But I wonder if you could talk about your thought process and how you’re allocating those expenses as you try to scale it up and make sure they are productive expenses?
Holger Bartel
Expenses for member acquisition fall into sales and marketing. So that’s what’s driving that increase and for us acquiring a member is an expense, so we have to record the full expense for acquiring a new member right away. Even though we obviously benefit from this new member for a long period after that. So that’s what’s driving the increase in sales and marketing expenses, James.
James Goss
Now is there any certain pace you’re trying to adhere to as you’re developing that? I understand it is in terms of growing the subscriber base domestically and internationally.
Holger Bartel
We want to do it efficiently and with a good ROI. So as I mentioned, in North America, we are seeing a much better ROI this quarter than last. So this means we will be spending more or investing more.
James Goss
Okay. A couple of things on the META project. Will the pricing of the service been a some flat subscription rate or based on usage? Is there any plan at this point?
Arveena Ahluwalia
I can take that. So we are building Travelzoo META in phases. And yes, there will be a preregistration and followed by an annual subscription fee.
James Goss
Okay. So you can use it as much as you want or as little as you want, but it will be the fixed rate that would be able to count on modeling?
Arveena Ahluwalia
Correct. Yeah. Annual subscription fee. Yes.
James Goss
Okay. And do you look at this as — do you think the subscribers to the service would look at it as a substitute for traveling or an opportunity to travel more than they would be on a virtual basis effectively? And with whom do you think you would compete? And will this give them sampling to intend to create some additional usage of your other services? Is that the ultimate goal? Or is it sort of separately just trying separate?
Arveena Ahluwalia
So Travelzoo META will be complementing real-world travel and attracting a completely new generation of members. So we will not be competing with real-world travel but making places that are inaccessible more accessible via virtual travel experiences. In addition, we’ll be providing other forms of travel experiences, which you cannot really experience in the real world.
James Goss
Okay. And maybe one final thing. In terms of the overall experience you’ve had with your higher demographics, do you think that has proven to be an advantage that’s kept your business better than it would be. Otherwise, I presume that’s how the target is working, but are there any thoughts you might add in terms of the rebound in your particular demographics?
Holger Bartel
Well, as you saw our members last year when we were still in the middle of the pandemic, and we’re not out of the pandemic, but when we’re still in the very middle of the pandemic, the majority of our members took more than three trips. So, I can just say we are very proud of the member base that we have built. It’s a high-quality member base, and that’s why we have so many travel companies who want to work with us. Travelzoo is not about cheap, we are about value. We are about great trips and experiences, and that’s what attracts this member base that, as I said, we’re very proud of.
James Goss
Okay. Thank you very much, Holger.
Holger Bartel
Great. Thanks, James. And ladies and gentlemen, thank you so much for your time and support. And we look forward to speaking with you again next quarter. Have a great day.
Operator
Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may now disconnect the lines at this time. Have a nice day.
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