Q2 2022 Travelzoo Earnings Call

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And then on the floor.

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Good morning, Pat.

Aldo.

Jonathan.

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Thanks.

Hello, everyone and welcome to the troubles in the 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 into forward. Looking statements are described in the company's Form 10-K, and 10-Q and auto preoptic 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 Companys earnings press release issued earlier this morning.

An archive recording of this conference call will be made available under travel to Investor Relations website at Travelocity Dot Com Slash I R.

Now, it's my pleasure to turn the floor over to a job with this global CEO .

But Tom.

Chip accounting officer, Lisa Soo, and his global director Thomas Amato, our vena Allo Walliams.

Lisa will start with an overview of the second quarter 2022 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.

Billable on our Investor Relations website at travel Dude Dot com.

Slash IR.

Let's begin with slide number three.

Our Q2 revenues were lower than expected however profitability was good.

Operating income, which we as management call operating profit.

With $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 eight sets.

Compared to the previous quarter the number of members remain the same.

On slide four we go into more details about the revenues and operating profit of our two more significant business segments nor.

North America and Europe .

North America continues to outperform Europe and 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 or 5%.

Europe had a operating loss of $1 5 million due to increase member acquisition spend in Q2.

As shown on slide five.

Even though revenue was.

It's 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 six North Americas 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 seven we provide information on non-GAAP operating profit as we believe it better explains how travel too.

Evaluates performance.

This slide shows the non-GAAP operating profit, which was $2 6 million in Q2.

Slide eight provides details on the items that are excluded in the calculation of non-GAAP operating profit.

Please turn to slide nine.

As of June 32022, 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 detailer of revenues by business segment.

When neutralizing FX changes the North America business segment saw year over year decrease of $1 6 million.

The Europe . This is segment, which we report in U S dollars is negatively impacted by the strong dollar.

Yet we saw in Q2, an increase by 700000 year over year, which represent 17% growth.

The local business, which consists of advertising from restaurants, spas 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 are relatively low in the foreseeable future while revenue is still expected to grow.

Now I turn over to Hooker.

Thanks Lisa.

From the perspective of management Q2 was a good quarter.

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.

Our 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've 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 you on slide 13.

With more than 30 million members seven.

7 million mobile App users and 4 million social media followers.

Levels with loved by traveling towards yes.

Affluent.

Active.

And open to new experiences.

The latest survey results for travelers, who members into yes, sure that 58% to 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'll provide an overview of what management and our global team are focused on.

We wanted to.

The increase the number of members and accelerate revenue growth to reach and then exceed pre pandemic levels.

Gross check flight clubs profitable subscription revenue.

Utilize higher operating margins to significantly increase EPS.

And launch traveled through meta.

So at this point I'd like to turn it over to Avi.

Who is traveling with global director travel to metal.

Thank you Holger.

I am happy to speak about travel zoom meta travel to new initiatives towards a paid.

Subscription based service and the metabolic.

In today's update we would like to address this.

And timing of travel to metal.

Please turn to slide 18.

Given the newness of this industry, we launched phase one in me 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 on strategy.

We will provide updates as.

Great.

The next slide on page 19.

Categories.

Value creation in the Metro markets.

According to a large consumer survey by Mckinsey and company published in June 2022, both Shaw and most of US travel is the second most sought after experience in the metro.

Please see the next slide on page 20.

Mckinsey and company report validates traveled to match our strategy.

Mckinsey and company found that consumers in the Metro North.

Looking to explore on travel digital world.

Travel motto will allow its members to do so and therefore give them the experiences they value the most.

Travel has been that the experiences will be browser enabled entertainment travel experiences that allow members to interact with.

And in the metal parts.

Travel meta is expected to attract a completely new generation of members.

In addition to complementing real world lifestyle and travel experiences.

Weighted by <unk> for its existing 30 million members.

Being a first mover is important.

With that I'm handing over to the operator for questions for Cologuard, Lisa and to me. Thank you.

Thank you the floor is now open for questions.

If you do have a question. Please press star one one on your bonds at this time.

Once again, if you do have a question ladies and gentlemen that is star one one on your touch some phones.

Please hold while we poll for question.

No first question coming from the line of Michael Kaplinsky with Noble capital markets. Your line is open.

Thank you for taking the questions.

As he mentioned the revenues were a little lighter.

I was wondering if you can just give us your thoughts on what caused the softer revenues.

There is still travel restrictions out there.

Most of those lifted do you think it's just consumer behavior or reaction to geopolitical events just your general thoughts.

Hi, Michael Yes revenues were a bit lower than we expected, but not that much.

I have to see we hit 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 over the last year or so.

It wasn't anything particular I would see the.

The biggest challenge in Q2.

<unk> debt.

As we all know.

Lines in hotels have reduced capacity.

Quite busy.

They have reduced capacity, because just struggling bringing desk staff back and trading 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 or beyond.

It's very clear Airlines airlines slashing their fields already.

Hotels are reducing their rates.

We certainly expect like many outdoors debt some economic challenges will be coming our way and we.

We believe that will actually be good for us because it makes it easier for us to.

Source deals fall where members but.

That was a bit the challenge in Q2.

You have to add debt.

The slight decrease in revenue was mostly driven by voucher purchase as <unk> mentioned, if a lot of our members purchased vouchers in Q2.

Last year.

We saw.

Great deal of redemptions now this year and while they are redeeming the vouchers. They are not immediately by a new one so.

That's what's causing the change however, our advertising business completely different is up very strongly versus the previous year.

Okay got it got it yeah, 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 men members. If you can just talk a little bit about.

The customer acquisition, there and then Jack's flight club member members increased.

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.

A question if I could how much did you spend in Europe for your customer acquisition in the quarter.

So remember acquisition as you said was up in Europe in Q2, because we saw a good opportunity.

In North America, our member acquisition cost now in Q3, you have come down quite a bit.

Probably because more people looking for deals or onto any towards service like ours.

So we are growing.

We are adding more new members in the U S. This quarter.

And Jack spiked up is growing again as well, yes, but both in the U K and the U S.

Alright, Gotcha and.

Hi.

If you could also talk a little bit about the capex for this year the rainy remaining.

The second half and maybe for next year.

And then a little bit about the <unk> 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 is.

Theres always the bleeding edge of the.

Being in the new technologies and new services like this 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.

Yes sure Lisa.

Maybe you can jump in here, but let me just explain the way we are approaching the meta versus opportunity is quite light on the investment side, it's not.

An investment in technology that we need to do.

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 feel free to add one heel aliso. Thank you cologuard.

Happy to add here. So we are building traveled with metal strategically using a phased approach and a cost efficient manner with no significant upfront investment and it is the phased cost control strategy that allows us to judiciously navigate the rapidly changing meta worse environment.

Also we will we are measuring in 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 investment in check.

Thank you one moment for our next question.

And our next question coming from the line of Edward Woo with <unk> capital. Your line is open.

Yeah. Thank you for answering my question in terms of what Youre seeing with some of the price cuts and the fall have you seen it greater than what it is normally seasonally on a basis.

And what are you hearing in terms of you know obviously high inflation impacting the consumer are you seeing some of your travel providers notice thing.

That slowdown in consumer demand.

Hi, Ed to answer the first question.

Well the the decrease is quite significant yes, because our hotel prices in <unk> were up so much in some muscle here, 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.

The theme they are looking for a valuable interestingly our members have not seen have not said that they wanted to cut back travel.

Maybe slightly shorter trips.

We're looking for a better offers and as I said, they are looking for value with travelers who.

It's ultimately about value because we deliver.

Delivering off we are delivering our members really.

Really incredible experiences at a great deal and that's what our 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.

We will probably see our existing members also more active than in the past few months.

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 are they all kind of acting the same currency.

The reaction to how the inflation is growing globally.

They behave the same way I would say we may be seeing in the U K consumer must be a little bit more sensitive to prices than in other markets, but in general to be able to see.

Great well. Thank you for answering my questions and I wish you guys. Good luck. Thank you sure you will come in.

Thank you our next question.

And our next question coming from the line of Steve Silver of Argus Research. Your line is open.

Alright, 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.

Kick in the levels of voucher redemptions. This past quarter, just trying to get a sense of your current thinking.

The capital position.

Just given the fact that the.

Merchant payables are coming down significantly the cash balances 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.

Yes, Steve I'll, let you.

You saw some more color but in short.

Everything is developing as expected our cash the ratio between cash and merchant payables is actually improving quarter over quarter more vouchers are being redeemed.

We redeemed a device.

Vast majority of vouchers that have been purchased technology being redeemed or some of them have been refunded.

So the number of outstanding Board Trust on which we have to pay the merchant is decreasing every quarter.

Also.

We have in addition to cash we have some deposits with the credit card processors.

Will be released.

The future also not all of them are paying off.

We received the cash only with a with a short delay after the transactions are processed but I guess, so can you explain to them. The more 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 cash position will actually improve.

We also expect a working capital deficit will also improve.

With that release.

So we are quite okay, great I know kind of the balance sheet.

Balance sheet will get much more robust.

Okay, great. Thank you so much for the color.

Thank you and our next question coming from the line of James Goss of Barrington Research. Your line is open.

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 youre trying to grow the business, but I wonder if you could talk about your thought process in how youre allocating those expenses as you try to scale it up and make sure they're productive expenses.

Expenses for member acquisition fall into sales and marketing so that's what's driving that increase.

And for.

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 the obviously benefit from this new member for a long period after that.

So that's what's driving the increase in sales and marketing expense history.

And then is there any certain pace youre trying to adhere to as you're developing that.

I understand this in terms of growing our subscriber base domestically and internationally.

We want to do it efficiently and with a good ROI. So as I mentioned in North America, we are seeing a much better alright. This quarter than last so this means we will be spending more or investing more.

Okay.

Thanks, Andy.

The project will the pricing of this service beyond some flat subscription rate or based on usage.

Is there any plan at this point.

I can take that.

So we are building travel too much emphasis on yes that will be a pre registration followed by an annual subscription fee.

Okay. Okay. So that you can use it as much as you want or as little as a lot, but it will be a fixed rate that would be able to count on modeling correct. Yes.

Yes, no subscription fee.

Okay and.

Do you look at this as a.

Do you think that the <unk>.

Subscribers to the service would look at it as a substitute for traveling or in Australia travel more than they would be on a.

A virtual basis effectively.

And with whom do you think you would compete.

And.

Let's give them sampling too.

Tend to create some additional usage of your other services.

Is that the ultimate goal or is it sort of separately destroying a separate.

For travel from that that will be complementing well work travel and attracting a completely new generation. All members. So we will not be competing with real world travel, but making places that are accessible more accessible via virtual travel experiences.

In addition, we will be providing other forms of travel experiences, which you cannot do experience in the real world.

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 capture 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 the in your particular demographics.

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.

Love the pandemic.

The majority of our members took more than three trips.

So I can just see we are very proud of the member base that we have built.

It's a high quality member piece and that's why.

We have so many travel companies, who want to work with us.

Travelers, who is not about cheap about value, we about great trips and experiences.

And that's what attracts this member base that are as I said, we're very proud of.

Okay.

Thank you very much older.

Great, Thanks, Jim 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.

Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect. Your lines at this time have a nice day.