Travelzoo - Earnings Call - Q4 2024

Executive Summary

• Q4 revenue declined 2% YoY to $20.7M while GAAP operating profit rose 8% to $4.9M (23% margin); diluted EPS was $0.26, modestly below last year due to FX headwinds and the absence of prior-year discontinued ops benefits.
• North America grew revenue 1% with a 33% GAAP operating margin, offset by Europe (-13% YoY) on Germany-specific softness; Jack’s Flight Club (JFC) grew revenue 19% and delivered positive operating profit.
• New membership-fee model began contributing: membership fees were $1.6M in Q4 and management expects at least 5% incremental revenue lift in Q1’25, with accelerating contribution through 2025 as recognition ratchets and conversions rise.
• Cash from operations was $7.7M; cash, cash equivalents and restricted cash reached $17.7M, now exceeding merchant payables—an inflection noted on the call; the company repurchased 135,792 shares in Q4.
• Consensus estimates from S&P Global were unavailable due to request limits; therefore, we cannot quantify beats/misses this quarter. Use company commentary for directional guideposts (noted below).

What Went Well and What Went Wrong

• What Went Well

  • Operating leverage: GAAP operating profit rose 8% despite a 2% revenue decline; Q4 GAAP operating margin was 23% (North America 33%) as fixed costs remained relatively stable and marketing remained variable.
  • Membership-fee ramp: Membership-fee revenue reached $1.6M in Q4; management expects at least 5% incremental growth in Q1’25 from pro rata recognition and rising conversions/new adds.
  • Cash inflection and capital returns: CFO of $7.7M in Q4; cash and restricted cash of $17.7M now exceed merchant payables; continued buybacks (135,792 shares).
    • Quote: “Our solid cash position grew even after repurchasing 135,792 shares… As of December 31, 2024, consolidated cash, cash equivalents and restricted cash was $17.7 million”.

• What Went Wrong

  • Europe softness: Europe revenue -13% YoY, primarily Germany-driven fluctuations; management cited delayed destination campaigns, lower cruise advertising, higher voucher breakage true-up, and political uncertainty.
  • FX drag on EPS: A strong dollar created negative “other income,” reducing EPS vs prior year; last year also benefited from discontinued ops adding ~$0.05 to EPS.
  • New Initiatives minimal revenue: New Initiatives (Licensing + META) delivered $19k revenue and a small operating loss (-$36k), remaining non-material near-term.

Transcript

Operator (participant)

Good morning and welcome to the Travelzoo Fourth Quarter 2024 earnings call. Today's conference is being recorded. Currently, all callers have been placed in a listen-only mode, and following management's prepared remarks, the call will be open for your questions. If you would like to ask a question at that time, please press star one on your telephone keypad. If you need to remove yourself from the queue, press star two. At any time, if you should need operator assistance, press star zero. 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 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 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 note that this issue was 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, and CEO of Jack's Flight Club, Christina Ciocca, and its Financial Controller, North America, Jeff Hoffman. Jeff will start with an overview.

Jeff Hoffman (Financial Controller, North America)

Great. Thank you, Operator, and welcome to those of you joining us. Today, I'm stepping in for Lijun Qi, our Chief Accounting Officer. 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 four. Travelzoo's consolidated Q4 revenue was $20.7 million, down 2% from the prior year. In constant currencies, revenue was $20.6 million. Operating income, which we as management call operating profit, increased 8% year over year. Q4 operating profit was $4.9 million, or 24% of revenue, up from $4.5 million in the prior year. While operating income increased and outstanding shares decreased, EPS was slightly lower compared to last year, and we'd like to explain why.

A year ago, extraordinary income from discontinued operations and relatively high other income from favorable FX trends added $0.05 to quarterly EPS. This year, a strong dollar at the end of 2024 led to negative other income and impacted EPS negatively. Without these effects, the EPS would, in management's opinion, better reflect the positive earnings trend. Slide six shows a revenue increase in both our North America and Jack's Flight Club segments, while revenues in Europe were lower. This was caused primarily by fluctuations in Germany, which we do not view as a trend. Operating profit increased in both our North America and Jack's Flight Club segments, but decreased in our Europe segment. On slide seven, we break down our categories of revenue: advertising, membership fees, and others. Advertising revenue was $19.1 million for Q4 2024. Revenue from membership fees increased to $1.6 million.

We expect this revenue to grow substantially in 2025. In 2024, we introduced a membership fee for Travelzoo. Legacy members who joined before 2024 were exempt from the fee during 2024. Legacy members represent more than 95% of Travelzoo's reach. In 2025, legacy members continue to receive certain travel offers, but club offers and new benefits are only available to club members. We generally see legacy members being excited to become club members. Slide eight shows an example of membership fee revenue recognition. Revenue from membership fees is recognized ratably over the period of subscription. Member acquisition costs, on the other hand, are recognized in full at the time of the expense. On slide nine, you can see that our GAAP operating margin was 23% in Q4 2024. Slide 10 shows that in North America, the GAAP operating margin increased to 33% for Q4 2024.

On slide 11, we provide information on non-GAAP operating profit, as we believe it better explains how Travelzoo's management evaluates financial performance. Q4 2024, non-GAAP operating profit was $5.4 million. That's 26% of revenue, compared to non-GAAP operating profit of $5.2 million in the prior year period. Slide 12 provides information about the items that are excluded in the calculation of non-GAAP operating profit. Please turn to slide 13. Our solid cash position grew even after repurchasing 135,792 shares of the company's outstanding common stock. As of December 31, 2024, consolidated cash, cash equivalents, and restricted cash was $17.7 million. Slide 14 shows how revenues compare 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 thus increase operating margin.

Now, looking ahead, in Q1 2025, we expect revenue to increase at a higher pace. The pro-rata portion of membership fee revenue will already add 5% incremental growth this quarter. This percentage is expected to increase over subsequent quarters as membership fee revenue is recognized ratably over the subscription period. We acquire new members, and more legacy members become club members. For the whole year, we expect substantially higher revenue growth. Over time, we expect profitability to further increase as recurring membership fee revenue will be recognized. I'll now turn the discussion over to Holger.

Holger Bartel (Global CEO)

Thank you, Jeff. We will continue to leverage Travelzoo's global reach, our trusted brand, and strong relationships with top travel suppliers to negotiate more Club Offers for club members. Travelzoo members are affluent, active, and open to new experiences. We inspire travel enthusiasts to travel to places they never imagined they could. Travelzoo is the must-have membership for those who love to travel as much as we do. Slide 15 provides more information about Travelzoo members. 91% say that they are open to new destinations and travel ideas. We are the club of travel enthusiasts. Slide 17 provides an overview of management's focus.

We are working to grow the number of paying members as we continue to convert legacy members and add new club members, add new benefits to make paid membership even more valuable, retain and grow our profitable advertising business from the popular Top 20 product, utilize higher operating margins to increase EPS, grow Jack's Flight Club's profitable subscription revenue, and develop Travelzoo META with discipline. Now, Christina will provide a quick update on Travelzoo META and Jack's Flight Club.

Christina Sindoni Ciocca (Chair of the Board of Directors)

Thank you, Holger. We continue to work on the production of the first Metaverse travel experiences. They will be browser-enabled. 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. Jack's Flight Club in 2024 expanded the team and increased marketing spend. We increased premium members. We also grew revenue 19% year over year. We continue to generate operating profit. We are well-positioned for 2025 to continue this growth trajectory with a focus on further penetration of both the Canadian and U.S. markets. I'm now handing over to the operator for questions for Jeff, Holger, and me.

Operator (participant)

At this time, if you wish to ask a question, please press star one on your telephone keypad. You may remove yourself from the queue by pressing star two. Again, please limit yourself to one question and one follow-up. We will take our first question from Michael Kupinski with Noble Capital Markets. Please go ahead.

Michael Kupinski (Analyst)

Thank you. Yes, my question is really related around the subscriptions. I was wondering if you can give us some color on the added value that you're offering for the subscriptions, the pricing, and maybe on the experience so far that you've had with your subscription. How many legacy members do you anticipate to convert to subscriptions? Any other additional color that you can give us about how your advertisers are viewing the subscription offerings and how that is being balanced, I guess, with your legacy advertising partners?

Holger Bartel (Global CEO)

Hi, Michael. Yes, that's a bunch of questions. Let me start off. The membership is a 12-month membership. In the U.S., it's $40. In the other markets, it's around the same in local currency. What you receive for that is really all the Travelzoo offers. In particular, we have started producing Club Offers, which are offers that only those who pay for the membership have access to. We just came off the last couple of days, our first Member Days. Member Days is an event four times a year where we have special offers, exclusive offers for our club members. Those were really quite amazing, I would say. We had, for example, London hotels for $99. Unheard of. It's a four-star hotel centrally located. Very, very well reviewed on Tripadvisor. We have a Europe trip with flights for $299.

We had a countryside escape in the U.K. for GBP 99 with dinner and hotel and breakfast. I mean, quite unbelievable. I'm just giving these examples because that's what's attracting both new members as well as legacy members to convert. How is it going so far? It is all going according to our plans, and it is in line with expectations. We do not release a specific number, but we had a good number of legacy members who already converted to paying members before the end of last year. As we are introducing these Club Offers and additional member benefits, which are exclusive to the members, this motivates legacy member conversion over the current quarter and over the future. We also see better results in new member acquisition. We have finally built a robust model that allows us to acquire new members at a cost that works for us.

Now we have started scaling. In Q1, for example, we're already on pace to acquire more new members for marketing than we did the entire last year. We are seeing more growth. Lastly, I think you asked about the advertising business. Our advertisers continue to reach the travelers that they used to reach in the past. Certainly, there's a lot of questions about what's going on, but their offers reach the same people and actually even more people than in the past.

One thing we're also learning is those that have switched to the paid membership model are much more active and much more almost glued to receiving our emails and Top 20. It's a little bit like, for sure, when you pay for something, you want to take advantage. The responses, both in terms of activity, click level, purchases that we are seeing from those who have become paying members of Travelzoo are quite impressive compared to what we saw before. Holger, thanks for that color. Just to follow up, you indicated that there will be an incremental $8.3 million, I think, or 5% of revenue growth from subscription in the first quarter. Can you talk about the current trends that you're seeing for travel and update us on differences between North America and Europe outside of the subscription?

I would say the U.S. people, I mean, in the U.S., the economy is doing quite well. There is now more uncertainty from a political perspective and particularly to what it means for consumers. Look, the very, very budget-conscious travelers are a bit hesitant from what we are seeing, but that's not really our member base. Our member base is more affluent, as you saw earlier from the chart. Higher-end and luxury travel in the U.S. and in Canada is still doing quite well. In Europe, I would say we see a little bit more hesitation on the consumer side. You know, that's, as I always say, that's good for us because if all hotels in London were full, they certainly would not offer a $99 room night at the centrally located four-star hotel for our highly valued Travelzoo members. They would not do that. I'm happy that this was almost the craziness of what we saw after COVID. I mean, they called it revenge travel. And all travel companies were so busy. That has certainly ebbed, and that's good news for us.

Michael Kupinski (Analyst)

Thank you for taking my questions. Appreciate it.

Operator (participant)

Thank you. We will take our next question from Patrick Sholl with Barrington Research. Please go ahead.

Patrick Sholl (Analyst)

Hi. I was wondering if you could maybe talk about the continued engagement levels of the members that haven't joined club and what, I guess, sort of has been what tends to encourage them to join. I guess just what share of those members kind of joined ahead of year-end? Maybe just talking about if you could talk a little bit about how many have joined since the start of the year.

Holger Bartel (Global CEO)

We actually do not see much of a change in the behavior of the ones that have not become paying members yet. Click rates are still on, click rates per email are still fairly similar to what we saw last year. We are not specifically releasing information on how many members have converted. We do not want to talk about that. What I can tell you is that we are currently on pace that at the end of Q1, we will have 50% more paying members than we had at the end of last year. That progress in one quarter is good for us and makes us happy. Maybe, Christina, you can speak a little bit about what motivates legacy members to become paying members because there is more than just the offers. There is a whole range of things that they benefit from. Christina, you want to speak about that for me?

Christina Sindoni Ciocca (Chair of the Board of Directors)

Sure. In addition to the offers, which we really believe are the core of the membership and the great service that we've always provided of researching and vetting the offers and identifying these offers, we are also adding other benefits. In Q4, we added lounge access for delayed flights. We saw quite a good response both from legacy members who were interested in that benefit and also from those external to Travelzoo. We've also launched a weekly giveaway where club members have the opportunity to win, to be randomly selected, to select any Top 20 offer that they would like to take for free. In addition to that, we've been building out our member services and have priority member services for club members. We're excited to potentially add additional benefits as the year progresses.

Patrick Sholl (Analyst)

Okay. You had mentioned weakness in Germany. I guess, can you maybe talk about why you feel that that was more of a one-off and maybe just additional commentary around Europe and the ad market there? Are there any sort of marketing expenses that you're pulling back on in order to market the paid service?

Holger Bartel (Global CEO)

Great. Europe, we were not happy with Europe in Q4, very clearly. We were disappointed particularly with Germany. The fluctuations were a result of many factors. Just some examples, some destination advertising did not run as planned. Some revenue got delayed. Cruise advertising was slow. On top of that, on the accounting side, we had the higher true-up of annual breakage revenue. We have to do that once a year. It is a true-up versus estimate that came in higher than what we expected because more people used their vouchers. Look, the political turmoil in Germany in Q4 where the government resigned, they just had elections last weekend. All of that did not help either. Many consumers and travel companies just went into a holding pattern. As you see, all these things came together all at once. As we said earlier, we do not see that as a trend that would worry us at this time.

Patrick Sholl (Analyst)

Okay. Thank you.

Operator (participant)

Thank you. We will take our next question from Steve Silver with Argus Research. Please go ahead.

Steve Silver (Analyst)

Thanks, Operator. Thanks for taking my question. Congratulations on reaching positive net cash. Looks like this quarter, the cash is outpacing the merchant payables for the first time since the pandemic. Congratulations to you guys, you have been working on that for several years now. The question is, with the expectation of significant ramping in revenues expected over the course of 2025, whether this might have any read-through to your ability to ramp growth investments like Meta while still maintaining discipline. I know you guys have been active in repurchasing shares. Just curious as to whether the ramp in revenues will allow you to increase growth investments as well.

Holger Bartel (Global CEO)

Thank you for pointing out the positive development in our balance sheet, Steve. Actually, Pat also asked about marketing, whether we are planning to spend more. Yes, we are. We are in 2025. We will ramp up marketing spend. We are already doing that in Q1. Why? Number one, we have found a model that works. If we can acquire paying members at a reasonable cost and we benefit from them over long periods of time, the renewal rates so far that we are seeing, we are happy with them. Of course, we invest because it is a smart decision for the business to do that.

Second, as revenues increase and as we were trying to explain earlier, that 5% incremental revenue growth we are seeing in Q1, that number will continue to go up throughout the year because the subscription revenues are only recognized over the course of the 12 months. It is a little bit difficult to really conceptualize that. That is why we are already happy with what we are seeing in Q1. Will that affect investments in Meta, in Jack's Flight Club? No, we look at these quite independently. As we also pointed out, Steve, we are developing Meta with quite some discipline. We are not still spending millions and millions or billions of dollars on developing that Metaverse experience. We do it rationally. We do not see that this is affected, particularly as our balance sheet is improving and we are generating more cash flow this quarter. Cash flow in Q4, as you saw, was among the highest we have seen in quite some time.

Michael Kupinski (Analyst)

Great. Thanks for all the additional color.

Operator (participant)

Thank you. We will take our next question from Ed Woo. Please go ahead.

Edward Woo (Analyst)

Yeah. Congratulations on the quarter. I have a question on the Jack's Flight Club membership and the Travelzoo Club membership. Are they separate products? Are there any plans to combine them so that you have one membership for both products?

Christina Sindoni Ciocca (Chair of the Board of Directors)

I can take that question. For now, we are operating the businesses independently, and that includes the membership. Since we've acquired Jack's Flight Club, we look for ways to find synergies between the two businesses. That includes some cross-promotion of both the membership and of content identified by either Travelzoo or Jack's Flight Club. We're doing that in a way that makes sense and is beneficial for both brands. They service slightly different markets. For now, that's the plan, to keep them independent.

Edward Woo (Analyst)

Great. Thanks for answering my questions. Thank you.

Operator (participant)

Okay. This concludes the Q&A portion of today's call. I would like to turn the call back over to Mr. Holger Bartel for closing remarks.

Holger Bartel (Global CEO)

Yes, dear investors, thank you for listening, for your time and support. We look forward to speaking with you again next quarter. Have a great day.

Operator (participant)

This concludes today's Travelzoo Fourth Quarter 2024 earnings call and webcast. You may disconnect your lines at this time and have a wonderful day.