TZOO - Travelzoo (TZOO) Q3 2022 Earnings Call Transcript
Travelzoo (TZOO)
Q3 2022 Earnings Conference Call
October 26, 2022 11:00 AM ET
Company Participants
Wayne Lee - Chief Financial Officer
Holger Bartel - Chief Executive Officer
Arveena Ahluwalia - Global Director, Travelzoo META
Conference Call Participants
Mike Kupinski - NOBLE Capital Markets
Jim Goss - Barrington Research
Steve Silver - Argus Research
Ed Woo - Ascendiant Capital
Presentation
Operator
Hello, everyone. Welcome to the Travelzoo Third Quarter 2022 Financial Results Conference Call. All participants have been placed in a listen-only mode and the floor will be open 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 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 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 Financial Officer, Wayne Lee; and it’s Global Director Travelzoo META Arveena Ahluwalia. Wayne will start with an overview of the third quarter 2022 financial results.
Wayne Lee
Thank you, Lisa 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 Q3 revenues were lower than expected. Consolidated Q3 revenue was $15.8 million up 1% from $15.7 million in the previous year. And in constant currencies it was $16.7 million, which is an increase of 6% year-over-year.
Our net income in Q3 was $790,000, which resulted in earnings per share of $0.06. Operating income, which we as management call operating profit was $270,000 which is approximately 2% of revenues. As of September 30, we had 30.5 million unduplicated members compared to 30.7 million as of September 30, 2021.
On slide 4, we go into more details about the revenues and operating profits of our two more significant business segments North America and Europe. North America revenue increased 9% year-over-year from $9.7 million to $10.5 million.
The operating profit in North America was $812,000 in Q3 compared to an operating loss of $918,000 a year ago. Europe revenue decreased by $725,000 or 14% year-over-year. At constant currencies, Europe revenue increased 2% year-over-year. Europe had an operating loss of $551,000 in Q3 compared to an operating profit of $600,000 in the prior year.
On slide 5, 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 $1.1 million in Q3.
Slide 6 provides more information about the items that are excluded in the calculation of non-GAAP operating profit.
Please turn to slide 7. As of September 30, 2022 consolidated cash, cash equivalents and restricted cash was $20.5 million. The cash balance reached the expected level as the number of vouchers outstanding has become smaller.
Slides 8 and 9 detail our revenues by business segment. The North America business segment saw a year-over-year revenue increase of $800,000.
Turning to slide 9. The Europe business segment which we report in U.S. dollars was and continues to be negatively impacted by the strong dollar. We saw revenue in Q3 decrease by $725,000 but in constant currencies revenue increased $200,000 year-over-year.
Slide 10 shows that the pandemic led to a significant reduction of fixed costs. We believe we can keep our fixed costs relatively low in the foreseeable future, while revenues are expected to grow. For Q4 of 2022, we currently expect substantially higher revenue and profitability. We see the demand curve in the travel industry returning to a more normal situation. We believe this allows us to negotiate and recommend more and better offers resulting in higher revenue. However, there could be unexpected fluctuations in the short term.
Now I turn over to Holger.
Holger Bartel
Thank you, Wayne. In Q3, indeed our revenue was lower than expected due to the unique travel situation in the summer of 2022. Demand jumped after the pandemic, but suppliers were still rebuilding capacity. The demand curve temporarily shifted, while the supply curve remained inelastic in the short term and didn't recover quickly enough from the cutbacks during the pandemic. This pushed up prices to levels where we did not want to recommend certain overpriced travel and leisure offers to Travelzoo members anymore.
In 24 years of Travelzoo history, I haven't seen a situation like this and I believe it will not last. So it was frustrating for us. While airlines, other travel suppliers and online travel agencies benefited from overpriced travel services, our business remained flat. Now we are seeing a rapid change. Demand is returning to normal levels. Suppliers continue to build up capacity. And we have more and better offers for our members, again and revenues are accelerating.
I would like to provide you a few specific examples that maybe illustrate what we are seeing. Today, for example, we are presenting to Travelzoo members in the UK an exclusive offer at the Grove of Narberth, one of only 12 hotels in the UK awarded five Red stars and four Rosettes by the British AA. For roughly £400 Travelzoo members can stay here two nights in an upgraded room with lavish bed and breakfast and a welcome gift. Just two months ago a similar package would have cost over £1,000 and the hotel was full.
One other example, in Germany last week Travelzoo members took advantage of a vacation package for €279 that included flights and four days at the 4-star Lisbon Plaza. Just a month ago, the hotel's occupancy was so high and flight so expensive that an offer for Travelzoo members would not have looked attractive. Now it very much does.
Or in New York prices at 4-star hotels often exceeded $400 to $500 per night or even more in summer. Now demand has flattened hotels are further staffing up and we were able to negotiate exclusive member offers this month for trips in fall and winter. Members have already booked over 2,000 stays just since the beginning of October.
As you see on Slide 11, with more than 30 million members, seven million mobile app users and four million followers on social media, Travelzoo is loved by travel enthusiasts who are both affluent, active, open to new experiences and they trust us. The latest survey for Travelzoo members in there show 58% took three or more vacations in 2021, which was the time when we still were in the middle of the pandemic; 94% have valid passports compared to 43% of the US population.
To summarize, Slide 13 provides 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. We want to grow Jack's Flight Club's profitable subscription revenue. We want to utilize higher operating margins to significantly increase EPS. And we want to launch Travelzoo META.
Arveena Ahluwalia
Thank you Holger. I am happy to speak about Travelzoo META. Travelzoo's 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 16. We launched phase one in Q2 in a controlled test environment to a limited set of users and have had significant learnings. We are continuing to extensively gather data and analytics and deploy these into our strategy. We plan to launch the next phase in Q4 and will provide updates as appropriate.
The next slide on page 17 is what are Travelzoo META experiences? Travelzoo META experiences will be browser enabled entertaining travel experiences that allow members to interact with and in the Metaverse. These experiences will in many cases overcome limitations of access, geography, economic and physical ability, as well as provide opportunities for social connection and interaction regardless of location.
Please turn to slide 18, which is consumer interest is confirmed. Travelzoo META is targeting a completely new demographic. Travelzoo META targets Gen Z. While Travelzoo META targets Gen Z, we interviewed existing Travelzoo members who represent a wide range of travel enthusiasts and real-world traveler and found they are interested in traveling in the Metaverse. 57% of those who have heard of the Metaverse want to travel in the Metaverse. In comparison, interest in shopping NFTs in the Metaverse was 2%.
This is in line with the consumer survey commissioned by McKinsey & Company. Their survey confirmed that after making social connections, exploring digital worlds is the most important driver of interest in the Metaverse.
With that, I am handing over to the operator for questions for Holger, Wayne and me.
Question-and-Answer Session
Operator
Thank you. The floor is now open for questions. [Operator Instructions] We'll take our first question from Mike Kupinski with NOBLE Capital Markets.
Mike Kupinski
Thank you and thanks for taking my questions. I have a couple. In terms of -- I was wondering if -- you mentioned that you're seeing a significant acceleration heading into this fiscal quarter. I was wondering if maybe you can give us some sense of how October performed and whether or not you were referring to October or if you're referring to the months of November and December in terms of the acceleration in travel. I was just wondering if you can give us some framework of your comments?
Holger Bartel
Hi, Mike. So I was indeed speaking about October. The offers I gave examples for and the response we are seeing is happening right now in October, so it relates to October where we see -- yes. I would call middle of July to middle or end of September more of an enormous slowdown where we were just not able or willing to promote as many offers to our members as we normally would do. And now we're back normal. In fact so far for next month it's looking quite good. I'm not able to quantify it right now, but you heard from Wayne that we are expecting in Q4 based on what we know today substantially higher revenues this quarter than in the year ago.
Mike Kupinski
Okay. In terms of gross profit margins, obviously, were a little lower because of the revenues being a little soft. Do you have any sense of where do you think that the gross profit margins move back towards where we were maybe in Q2 where they were maybe 87% or so? Do you have any sense about how gross profit margins look?
Holger Bartel
Yes. As revenues continue to grow or accelerate again, we will be getting back to the same profit margins.
Mike Kupinski
And then, can you just describe in terms of your acceleration in travel is that -- maybe if you can frame for us Europe versus the North America in terms -- are we seeing similar increases, or is it one versus the other?
Holger Bartel
All of the markets, we see the same trends really everywhere. Summer was -- what I talked about when I explained what happened in summer, we saw that in all markets. And now we are seeing the same acceleration in all markets both in Europe and North America.
Mike Kupinski
And it was expected that the cash position would come down because of the merchant payables and so forth and -- but it just -- look, when you look at the merchant payables as a ratio --I'm sorry, cash as a ratio of merchant payables, it looks like that percentage has come down. It was like 63% I think in the last quarter. Now it's 51%.
Can you just describe to us what the cash management opportunities are here? How you view the redemptions of merchant payables? And how you look at your cash position and capability of fulfilling those merchant payables, given your cash position?
Holger Bartel
Sure. Wayne can comment on that, because we do of course every quarter quite sophisticated cash forecast. And for Q4 we expect that cash will decrease again, a little bit by a few million but merchant payables will decrease much more than that because we have a vast number of vouchers that are expiring this quarter. But Wayne do you have any further comments on this?
Wayne Lee
Yeah. So the cash movement in Q3 as Holger said was expected. Well, it's as we had expected. It's again due to a decrease in merchant payables. And we're expecting the cash balances to then improve as revenues increase.
Mike Kupinski
So in terms of the -- can you -- do you have a sense of how much of those merchant payables are going to expire versus being redeemed?
Wayne Lee
With regards to redemptions and expiration, even after the voucher will expire then -- in certain cases then we would then still pay the breakage amount to the merchants. So there would still be a payment.
Mike Kupinski
Got you.
Holger Bartel
So our forecast actually shows that the cash position will decrease again a little bit in Q4. Then that will be the lowest point. And then we will go up from there quite significantly in Q1, Q2 next year, based on our current models. Merchant payables will go down more than cash so as a result working capital -- the net working capital will improve over the next few quarters which is important to us.
Mike Kupinski
Got you. Okay. That's all I have for now. Thank you.
Holger Bartel
Sure. You're welcome, Mike.
Operator
We'll take our next question from Jim Goss with Barrington Research.
Jim Goss
All right. Thanks. Yeah, I doubt this is the same sort of situation you've lived through before given the extreme nature of the pandemic. But I'm wondering if you could discuss that process in your role as suppliers rebuild capacity and develop travel options that you can better suit your clientele.
And maybe talk about the volume of offers versus the uptake on those offers. Obviously if the hotels are full and the flight prices are high there would be less reason for them to want to employ an outside agent of any kind to sort of build traffic.
But as you move back into what you described as a lumpy process just -- can you talk about that -- what you're going through right now and trying to get there and how you're communicating that with your clientele?
Holger Bartel
Yeah. It's actually quite simple, Jim. So first the world has never seen a period where for two years people could simply not travel. So what happens when they can travel again, they want to travel, and they didn't care what it costs.
So they were willing to pay prices that were just absurd. And some hotels became actually quite greedy. And I mean I saw in cases where three-star hotels charged over $1000 a night, but people were desperate to go. If this is your first time in two years to visit your grandmother that your grandchildren have never seen, you don't care. You just go, okay? But it's very unusual as you said.
Second hotels airlines, cruise lines everybody cut their staff during the pandemic. It takes time to rehire. Some of the hotels in July, they had the demand. July, August, September they had the demand. However, it just did not have the people. So hotels actually made only maybe 50% of their rooms available. Some of them were happy, because they said, oh, if we sell 50% of our rooms at twice the price, we make the same amount of money with less employees so that's good for us. So that's really what happened.
And it just takes time to rehire pilots train them. It takes time to hire people to work in hotels again. It takes time to rehire people at restaurants and anyone who has been at a hotel over the last few months sees that the level of staff and service levels are just not what they used to be. But that's changing. They all want to hire back to the levels, where they were before, and that's what we mean by un-elastic supply. The supply in the travel industry is not coming back quickly. It just takes time.
And third, so how do the members respond to that? Well, first of all, as I said, and gave with these examples, it's changing. People are not paying these high prices any longer. They are looking for better offers. Hotels are not full anymore. Many flights are not running at full capacity any longer. So now we have fantastic offers for our members, at a time when they have been used to very high prices. So for us, it's actually a very good situation right now after these four or five months of summer, which have been frustrating for us. Now, members love to receive these offers.
They take advantage of them. They take up on them at even higher levels than what we saw before the pandemic. So in general, we are doing fine. But I just explained this today very diligently in the call, because as earnings from other travel companies will be coming out in the next few weeks people will wonder why are the OTAs doing so well? Why are the airlines reporting record revenues? And why is Travelzoo not yet back to where we were before the pandemic? And I hope we were able to explain today why this was a very unique situation this year that we just haven't seen before.
Jim Goss
Okay. Thanks. Just a couple of other things. The fixed costs that you were able to contain during the pandemic, I wonder if you could talk about how much of those cost and expense levels you think could return and whether you're still able to get a benefit of the resetting of some of their cost structure during pandemic over the next year or two?
Holger Bartel
First a lot of these expenses came from our Asia Pacific division, which we decided to close down in 2020. And second, we are not expecting these to increase significantly. We are currently operating with the resources that we believe we need to operate this business. Increases will probably come in 2023 from two factors.
First of course like other companies, we will have to increase salaries, so there will be a few percentage points that the expenses will go up because of just the inflation that we're seeing all over the world. Second, we are planning to invest more in member acquisition. We have spent the last six, nine months to really improve and our efficiencies are now better than before.
Q4 is generally not a quarter where it makes a lot of sense, to invest in member acquisition. But Q1, Q2, Q3 when that comes back we will increase our investments. So related to that, then expenses will go up maybe by $1 million or $1.5 million. But in general, it's not that we are expecting Jim, that our fixed costs will go back to the levels we had before pandemic.
Jim Goss
Okay. Thanks. And then the last one, with regard to META. The notion that Gen Z might be a good target market, since that's probably something ingrained in them as they've grown up, is this something you think is transitory or something that they will then take the lead on and sort of expand into other areas, as they move into other stages of their life?
Arveena Ahluwalia
I can take that.
Holger Bartel
We were actually very surprised by -- we were actually very -- sorry Arveena, you can respond, but I just want to comment. I personally and we were very surprised, when we surveyed our existing Travelzoo members, which are a little bit older, how much how strong their interest actually in this META offering was so that was my surprise. But indeed, the Generation Z, in which we don't have a lot of -- which currently don't represent a lot of our members, that's the completely new market we're looking at. I'm sorry, Arveena, to interrupt you. So, please go ahead.
Arveena Ahluwalia
I agree with Holger. I mean as we know, it's typically the Gen Zs and that audience, which tend to be early adopters of new technologies, but our survey clearly confirms that there are other generations as well, who are also super interested in the Metaverse. So, we definitely see this like we started -- we think this is going to be a wider demographic than we imagined.
Jim Goss
All right. Well, thank you very much
Operator
We'll take our next question from Steve Silver with Argus Research.
Steve Silver
Thanks everybody. Thanks for taking the questions Most of my questions have now been answered. That was a very great level of detail, you guys provided, so thanks for that. I guess, the last question that I had related to the mention of significant learnings on Travelzoo META. Just trying to get a sense, as to whether there's something more specific in terms of, the learnings that you guys have acquired whether that relates more to just the potential demographics for the offering or whether there's just something embedded in the offering itself, that you guys have learned along the way as you develop.
Arveena Ahluwalia
Sure. I can take that. So as you know, we are proceeding with a test-and-learn strategy and the test launch, which was conducted in Q2, was to really determine the feasibility of our strategy. The test was conducted as mentioned previously, in a controlled manner both internally and externally to a limited set of users.
And we did acquire significant data from this test, and we have tweaked our strategy accordingly. Now, also given our attempt to be the first mover in providing travel experiences in the Metaverse, please understand at this time, we can only provide limited information, but we have been following up with the data and analytics provided from that study and implemented them in our current strategy.
Steve Silver
Great. And your slide mentioned, I think 57% of those members you asked had expressed interest in META. Just trying to get a sense, as to whether -- as the product is launched and you take your learnings and just improve on them further, whether you think ultimately over time that there would be an opportunity to go after or capture some of those members, that did not express interest at the outset.
Arveena Ahluwalia
Absolutely, that is the intention because like any early technology, the adoption rate is limited. Initially, there's -- they are the early adopters, but that grows on. But absolutely, we do plan to at some point go after even people and pursue people who have not yet heard of the Metaverse or haven't expressed interest in the Metaverse yet.
Steve Silver
Great. Thank you, so much for taking the question.
Arveena Ahluwalia
Thank you.
Operator
We'll take our next question from Ed Woo with Ascendiant Capital. Please go ahead.
Ed Woo
First, I want to say, welcome back Wayne. It's good to hear your voice. And then, the question I have is, we know how demand you mentioned is beginning to return back to normal. How much of it do you think is because of seasonality, or how much do you think, it is because of the economy, or how much do you think, it's because of just people already getting the travel -- initial travel out of the way and may not have that kind of high demand that they had previously?
Holger Bartel
Ed, I think we just see this across all industries. In any country in the world, we had this pandemic and that changed consumer behavior and they used more tech. They were at home. They went out less. They traveled less. And now everything is going back to normal and almost see anywhere on any front. Seasonality was different. Seasonality is going back to normal. So, I think we're seeing exactly the same in the travel industry.
I would say, also that the pandemic has probably made people in general more interested in traveling, because once you're actually at home for two years and you're not going anywhere, you really realize what you have been missing. So, that's not only coming from me, but from other companies as well. We are hearing that generally consumers will probably after this pandemic have more interest in experiences in travel in -- and we still see in the past I sometimes talked about sort of bucket list experiences that people are looking for. And we still see at Travelzoo that in general members are interested in trips, vacations, experiences that include things that go beyond what is normal, higher price points, better hotels, better trips, more activities. They want to do something special.
Today we have an offer in the US for our members for travel hunting in Italy. We already heard from several members back, great, I always dreamed about doing that. And that's the kind of behavioral change that we see among consumers. But otherwise, I think in the next year and probably more quickly than expected, things will shift back to the normal patterns we had before the pandemic.
Ed Woo
Great. And my last question is just on the macro environment, you mentioned that a lot of these travel suppliers, hotels are ramping up. But have we seen them slow down or actually cut back again, because they're concerned that, we have various macro issues in the US and globally?
Holger Bartel
No, I haven't heard about it.
Ed Woo
Great. Well, thanks for answering my question and I wish you guys' good luck. Thank you.
Holger Bartel
Sure.
Operator
And I would now like to turn the call back to Mr. Holger Bartel. Please go ahead.
End of Q&A
Holger Bartel
Yes. So, thank you for your interest in today's call and we look forward to speaking with you again next year or next time and have a great day.
Operator
Thank you, ladies and gentlemen. This concludes today's teleconference. You may disconnect your lines at this time. Have a nice day.
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Travelzoo (TZOO) Q3 2022 Earnings Call Transcript