Q4 2019 Earnings Call

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 presented in the slides, but are not statements of historical facts constitute forward looking statements and are made pursuant to the safe Harbor provisions or 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 could 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 archive recording of this conference call will be made available on the Travelzoo Investor Relations Web site at travels your dot Com Slash IR.

Pleasure to turn the floor over to Travelzoos Global Chief Executive Officer, Holger Bartel as Chief Accounting Officer, Lisa Su is so we'll start with an overview of the fourth quarter 2019 financial results.

Thank you Jamie.

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 number three provide financial highlight.

Fourth quarter.

Revenue for the quarter with 26.9 million.

In constant currencies revenue with consistent year over year.

However in nominal terms revenue with 164000 last year over year.

Our diluted loss per share for the quarter with slide.

Certain one time expenses and a higher tax provision recorded in Q4.

Cause the EPS to go negative.

On the next slide on page four.

You can see cash flow from operation was up.

Operating income with positive.

We would also like to highlight growth in new traveled to members accelerated in Q4, when compared to last year.

New member growth with 18% higher.

Slide five detailed 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, with 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 decrease year over year from 1.8 million to 1.6 million.

It was the smaller decrease in previous periods.

In Q4, we believe we made very good progress so far 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 six we would like to highlight the positive performance in our core businesses in North America in Europe.

Continued strong performance of our core business is math by our development business in Asia Pacific.

In our core business revenues operating income and EPS grew in 2019.

Operating margins in these businesses are running at an annual rate of 16.2%.

Earnings per share from North America in Europe for the trailing 12 month or at one dollar and two cents.

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 use 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 seven shows something we believe is very important for a futures this that.

Increasing revenue and higher margin allow us to grow EPS, while investing in creating more visibility for travel.

We want to continued growing traveled the following among consumers.

There are still many people who have not heard about us yet.

The next few slide cover detail of our revenue for each of our three business segments.

Slide eight 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 2.8 million.

Turning to slide nine.

Europe revenue increased from 9.1 million to 9.3 million.

In constant currencies to 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 two factors.

Number one special marketing initiatives, including a TV advertising campaign with partner Deutsche Vod and 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 increase cash balance of 19.5 million.

Looking forward, we expect the following.

Travels he was a counter cyclical business.

We have seen several times in our operating history.

When occupancy rates of travel suppliers are decreasing.

Probably does better.

For Q1 for their travel do business.

We are expecting some advertisers the delay inclusions into Q2.

However, we currently see this effect fully offset by an additional revenue contribution the highly profitable Jack flight club.

For Q1, we currently forecast consistent or growing revenue.

40 year 2020.

We expect revenue growth and EPS growth to be driven primarily by Jack slot play club.

We plan to update investors as we have better visibility on how fast Jack's flight club couldn't be introduced to all traveled to members.

Now here 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.

So the counter cyclical business.

When occupancy rates of travel suppliers, a dollar travels with us battle.

Declining occupancy rates.

The two more aggressive discounting into marketplaces.

This allows travelers who producers who find travel deals.

And that's what they do best.

To find even more compelling deals for 30 million members.

And according to this becoming more attractive for them.

Travel suppliers want their occupancy rates to go up and Travelzoo is very good at that.

Our members off through our affluent.

45% of them earn over $100000, a year, 86% have passports and they respond to deep price discounts.

[noise] hotels love spending money or Travelzoo, because we are not a take rates company in general.

This leads to higher returns on capital with high quality guess that spending money.

In January we acquired a majority stake inject slide club.

Highly profitable fast growing subscription service.

[noise] that informs consumers about FDIC us.

Indeed investor presentation, Please turn to slide 16.

Check Slide club office, the free subscription as well as a premium service for which members paid between 40 and $60 annually.

The subscribers are primarily.

Primarily in the UK.

Management is excited about this acquisition.

We believe it might have a bulk big positive impact on travelers, who was consolidated financial results in Twentytwenty and beyond.

After the acquisition on January 13.

The existing checks flight club business alone is projected to contribute additional 5% revenue growth and I do and an additional 20 cents in es.

In Twentytwenty.

Please turn to slide 17.

Our strategy will be to leverage our global reach and introduce check slide club to up to 30 million Travelzoo members.

Each new checks flight club member will bring more profitable high quality subscription revenue.

The chart on the right shows how contribution to offer operating profit will be driven by the number of premium subscribers.

We cannot see at this time, how many travelzoo members. We can successfully introduced to check Slide club, we know that service. This strong for consumers and we will provide investors an update in our next earnings conference call.

Now back to the operator.

The floor is now open for questions. If you do have a question. Please press the star followed by one on your Touchtone phone is at this time.

Once again, if you do have a question, ladies and gentlemen star followed by one on your touched on phones like.

He has held Wally poll for questions.

Our first question comes from Michael Kupinski with Noble capital markets. Your line is now open.

Thank you. Thanks for taking the question I have a couple of them.

First I know that you indicated that your counter cyclical, but obviously with the corner Gors buyers. We are saying you know even some companies restrict non essential travel, including some from Silicon Valley and then in New York specifically.

Can you just kinda 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 of countries that might be responding to the issues about call. It bears.

Yeah.

Yes, Hi, Michael Europe is more affected right now the North America as I said, we see advertise a sports boarding 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 reason.

Out of businesses canceling or restricting nonessential travel that's ultimately good for us because that means more empty airplanes more empty hotel rooms, more offer small deals fall with members and while we see certainly an impact in Q1, we believe that over the rest of the year. This will benefit our company allows us to grow.

Gotcha, and then can you can you give a <unk> I guess, you're saying you said you're seeing an impact in Q1 is it just that they are delaying travel or or or I'm, just trying to understand what you mean by that.

Yes, it will ties without the leading advertising agreements on advertising in cream and includes a certain office that they want to promote and right now they're just delaying it rather than canceling it.

Gotcha, and then can you give me a little bit more details about Jack slight club it sounds like a great acquisition <unk> have you provided a full year revenues and contribution margins for that and or is there any particular seasonality that we should all right I would assume that there might be some but being a subscription business really is quite high.

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 the attributes of the demographics the premium subscribers how many at the premium subscribers Holly trips do they book a year, what maybe some ideas about what a premium subscriber looks like at white <unk>.

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Yes, a lot of questions, Mike sorry, disappoint off at this 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 a check slight club paying subscribers premium subscribers. They had 110000 at the end of 2019, and just six or seven weeks leader, we have already grow into 126000.

Premium subscribers so.

We are really excited about the impact that we can be gone this business with having 30 million a you know loyal travelzoo members around the world.

And then just turning to Asia real quick can you give us a sense of what you expect that contribution margins might be wants it sounds like you're getting Asia fixed, but can you give us a sense of where you think those margins by grow too.

So as we said earlier and as Lisa explained in Q4, we had increased expenses in Twentytwenty, we expect the expenses going down as the 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 see right now.

Also in Asia Pacific, our what we are seeing right now.

Outside of China.

He stepped up in Australia, Japan.

We don't actually see a lot of a impact from the virus situation less than I would have expected and in China itself. We are.

We are publishing our top 20 again, we are promoting offer steel.

We also see Chinese members to book these offers.

Gotcha. Thanks for the color appreciate that.

Thank you. Our next question comes from Steve Silver with Argus Research. Your line is now open.

Good morning, and thanks for taking the questions I'm, hoping you could provide some thoughts about a 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 kinda, it's kinda companies would be an extremely high demand and really spark a more competitive acquisition market.

So just trying to get your thoughts on that in the prospects for additional deals of that nature moving forward on and given the parameters of jacks business congratulations on getting that deal done.

Yes, you're absolutely right subscription businesses are very attractive we see that a with a lot of the technology companies like.

For example, Microsoft Adobe how their valuation has gone up once they started switching to subscription revenue. So we're really excited about CIC slight club.

And we will certainly also explore whether we can build certain elements of a subscription business.

Within our travelers who member base.

Great. Thank you so much.

Thank you. Our next question comes from Ed Woo with Ascendiant capital. Your line is now open.

Yeah. Thank you for taking my question. My question is more on the impact by geography, obviously looked like Asia has been impacted person now Europe and North America is done what you're seeing in your business as well.

Absolutely we are seeing Asia already starting to rebalance away 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 remembers the North America booking trips to Europe. So it's not that everybody just a is stopping to travel in North America.

The impact is relatively relatively minor right now I would say primarily related to trips to Europe, but as you know do situation with the virus.

Changes every day.

And we have to see what happens in the next few weeks.

Great and then going up all of your comment about how I'm of the advertising deals are being or you want to Q2.

You want the general you have your customer.

Quite or are they really saying you just as is normal.

Where do you think.

To be more.

And due to uncertainty.

Look ultimately it deals on motivating.

Consumers to travel.

We all know debt at the media is is communicating very strongly regarding this virus. The situation maybe some of it is exaggerated people have you're right now but people are traveling and people will get over this you know as I said before.

When we look back at 911, 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.

Indeed peer yet so I think while in the short term, yes, we are seeing postpone men's off at Virtus mens into long run over the course of Twentytwenty I think we will benefit.

Great and then you know touching back on.

And your M&A you know, obviously you guys.

I'm very good acquisition with.

Oh It doesn't mean that you guys are only going to eat it you look at more opportunities out there.

Right now we haven't seen any changes really in the competitive landscape, but I believe that a more M&A activity will certainly be coming up.

Step leash players were always looking to grow and we will continue to look for potential companies that are interesting for our business.

All right well. Thank you for asking my good luck.

Thank you. Our next question comes from James Goss with Barrington. Your line is now open.

Hi.

Thanks for taking my question a this is Pat on for Jim I was wondering if you could maybe talk about now maybe some more recent comps with no prior epidemics.

Or in terms of how that's those has affected consumer behavior I may I guess there aren't many.

Comes to go with it just anything that you guys have seen historically.

Hi bed hype had a very good question, we're not spending.

A lot of time right now to analyze a lot of data in detail. So oh, sorry, I cannot drive provide you a lot of information I'll focus right now really is to work with our travel partners. How can we assist them in this period, how can we assist the crews.

Industry, how can we assist the airline industry to drive more business and to you know actually create benefits and.

And assistance with them in this period.

Okay.

Thank you.

Okay, I'll now turn 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.

[laughter].

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