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Edited Transcript of TZOO earnings conference call or presentation 25-Jun-20 3:00pm GMT

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Q1 2020 Travelzoo Earnings Call NEW YORK Jul 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Travelzoo earnings conference call or presentation Thursday, June 25, 2020 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Holger Bartel Travelzoo - Global CEO * Lisa Su Travelzoo - CAO ================================================================================ Conference Call Participants ================================================================================ * Edward Moon Woo Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media * James Charles Goss Barrington Research Associates, Inc., Research Division - MD * Michael A. Kupinski NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst * Steven Silver Argus Research Company - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Hello, everyone. Welcome to the Travelzoo First Quarter 2020 Financial Results Conference Call. (Operator Instructions) 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 these 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 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 Chief Executive Officer, Holger Bartel; and its Chief Accounting Officer, Lisa Su. Lisa will start with an overview of the first quarter 2020 financial results. -------------------------------------------------------------------------------- Lisa Su, Travelzoo - CAO [2] -------------------------------------------------------------------------------- Thank you, operator, and welcome to those of you joining us today. First, please let me explain why we report Q1 earnings today. In March, the SEC issued a release, which allowed companies to delay the filing of their quarterly report by 45 days due to the circumstances related to the COVID-19 pandemic. This allowed us to have more time for the accounting work related to Travelzoo's acquisition of Jack's Flight Club, the reclassifications required for the Asia Pacific business and impairment analysis for long-lived assets. 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 #3 provides the effects of the COVID-19 pandemic. Revenues decreased year-over-year by $8.9 million. Loss of revenues and certain onetime expenses caused the EPS to go negative. On the next slide on Page 4, you can see due to the effects of the onetime charges in Q1 2020, we have put together a chart to show what the onetime expenses were, which include impairment of goodwill and bad debt, which are directly related to the current pandemic. While our net income from continuing operations were still negative, these onetime noncash items increased our loss by $2.7 million. Without these noncash book expenses, the company would have reported around a $1 million loss for Q1 2020. On Page 5 and Page 6, our revenue is detailed by business segments. When neutralizing FX changes, both North America and Europe recorded a decrease in revenue of 32% due to the pandemic. We saw advertising drop off significantly in March of 2020 in both Europe and North America due to advertisers reducing or canceling advertising due to the pandemic. Consequently, as shown on Page #7, the operating expenses were relatively flat compared to year-over-year, but we went into a negative position due to the loss of revenue. The company's cash balance decreased to $14.4 million at the end of Q1 2020, but we expect to generate $13 million to $14 million in cash from operations in Q2, offset by cash used in financing which includes $6.8 million to pay down the promissory note. We expect to end Q2 with around $24 million to $25 million cash. On Page #9, the summary is that the company's [exchange] revenue decline with what's (inaudible) in lost revenue due to the COVID-19 pandemic. We attempted to reduce expenses for Q1, but by the time those changes were made, it was too late. We expect the reductions to hit in Q2. The company also had 2 significant unusual noncash expenses for Q1 2020, which are related to the impairment for goodwill and intangibles (inaudible) $2.9 million and in [case] use for bad debt of $1 million. We discontinued the APAC business segment with our onetime losses of $1.6 million (inaudible) but will eliminate significant markets going forward. We finished our acquisition of Jack's Flight Club, which is highly profitable. But due to onetime impairment charges, this revenue (inaudible) Jack's Fight Club had a negative (inaudible). We also had a onetime increase in bad debt provision (inaudible). Now Holger will provide an update on strategy and management's focus before we open the floor for questions. -------------------------------------------------------------------------------- Holger Bartel, Travelzoo - Global CEO [3] -------------------------------------------------------------------------------- Thank you, Lisa. Going into Q2, we were able to adjust our content offering quickly and successfully. After 92% of Travelzoo members told us in an online survey, they were interested in receiving travel deals if the offers were flexible, we focused our weekly Top 20, which has, for the last 20 years, been the definite list of the week's best travel deals on the Internet on flexible and worry-free offers. Travel dates of most deals are extended to late summer and fall, or even into 2021. Accelerating demand from our members has created a relatively strong business for Travelzoo. In Q2, we have already generated cash flow from operations of more than USD 11 million Q to date -- quarter to date. We also worked on and have already achieved a significant reduction in operating expenses. Please refer to Slides 11 and 12 and (inaudible). Besides being focused on generating positive cash flow, we will, as previously announced, leverage the opportunity to grow Jack's Flight Club's profitable, subscription revenue, particularly in the U.S., where it launched in Q2 2020. Now back to the operator. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Jim Goss of Barrington Research. -------------------------------------------------------------------------------- James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [2] -------------------------------------------------------------------------------- Okay. I have several questions. One is I'm wondering if this situation that has developed and the turmoil creates a market share opportunity for Travelzoo versus bigger competitors. Are there aspects of the business that you think you can penetrate more significantly that might have been owned by them that you -- will now be part of your profile? Or other things that might be a positive that might come out of this for you. -------------------------------------------------------------------------------- Holger Bartel, Travelzoo - Global CEO [3] -------------------------------------------------------------------------------- Hi, Jim. Yes, I think so. What Travelzoo does is we are providing our members with irresistible offers that motivate them to go on trips that they didn't think about. So in that respect, our service to the travel industry is to create demand. And at the time when many consumers are hesitant to travel, that's exactly what the travel industry needs. You can imagine that hotels around the world, airlines and cruise lines all want to see demand, and that's what we do. And that's why times like right now are normally good for our business. In the past, when we had periods like 9/11 or the economic crisis, it was always a time when our business did quite well. So yes, I think there's a good opportunity for us over the next few months and probably even for the next 1 or 2 years. -------------------------------------------------------------------------------- James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [4] -------------------------------------------------------------------------------- But you also talk about the flexible travel deals you're offering. And assuming you need buy-in on the part of the travel providers, I'm just wondering if you could talk about the formulation process and negotiations with those travel providers in creating something that could be more of an issue if there were things you had to buy and resell and then you were on [demand?] -------------------------------------------------------------------------------- Holger Bartel, Travelzoo - Global CEO [5] -------------------------------------------------------------------------------- Yes. The travel providers like it, but most importantly, the question is do members like it? And what our voucher model offers to members is that they can lock in a deal, but they don't have to decide right away when they travel. They can, but they don't have to. And the deal is flexible. In many cases, it's even refundable. So what that allows the member is to make travel decisions and plan at the time when the uncertainty is still high, and it's not even clear when you can travel to some of these countries. So that creates the demand I spoke about. And that's why the travel industry, and in particular, hotels and resorts, are very happy with that offering right now. It's also an offering where travel is quite unique. They are not -- there are no other companies in North America or Europe that have exactly the same model. -------------------------------------------------------------------------------- James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [6] -------------------------------------------------------------------------------- So you don't have any risk exposure on those flexible travel deals that would -- you're the intermediary, so you don't really have an issue where you might have -- I think that someone like Expedia might buy a certain number of hotel rooms or flights and then resell them. You don't have any of that type of exposure in any of the elements of your business? -------------------------------------------------------------------------------- Holger Bartel, Travelzoo - Global CEO [7] -------------------------------------------------------------------------------- Yes. Correct. We don't assume any risk. And in fact, we retain the funds and pay them only to the travel providers after the trip is completed. -------------------------------------------------------------------------------- James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [8] -------------------------------------------------------------------------------- Okay. The last thing I might ask you is I think in a number of cases, the global pandemic creates changes that will persist into the future beyond the current crisis. What would you think of are elements that might fall into that category for Travelzoo and for the industry? -------------------------------------------------------------------------------- Holger Bartel, Travelzoo - Global CEO [9] -------------------------------------------------------------------------------- Well, we plan, of course, for the industry to take some time to come back. And we are not only in travel, we're also in leisure, restaurants, activities. We are planning, of course, very prudently for a slow return, but we also believe that the return to travel can come possibly much more quickly than a lot of people expect. In fact, some of the destinations and hotels in 2021 are already seeing much higher occupancy rates. And as you can imagine, after 3.5 months of most people being stuck at home, they are all eager to travel again. So we are actually seeing and we have seen already for the last 2 months that our members are very excited to travel again, and we see that in the demand that has accelerated from April to May and to June. So I think, yes, the travel industry could possibly recover much more quickly than people expect right now. -------------------------------------------------------------------------------- James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [10] -------------------------------------------------------------------------------- I might throw in one more, and that relates to international travel and restrictions at airports. Some of the airports that are -- have been locked down are reopening, but with certain requirements that there might be, say, a 72-hour window in which you need to show an evidence that you had a COVID test that proved negative, and you might face something else once you get into that area. And if you showed any symptoms, they might quarantine you or charge some significant costs. I wonder how much of a stumbling block that sort of process is going to be to get travel and to facilitate it once again. -------------------------------------------------------------------------------- Holger Bartel, Travelzoo - Global CEO [11] -------------------------------------------------------------------------------- We hear that consumers accept it, and our members tell us 2 things that are important to them: First, flexibility of offers. When they buy a trip, they want to not have to worry about the need if they have to cancel it; and second, cleanliness at hotels, resorts, flying airlines. Anything that contains and increases their safety and security is something that they are willing to do and understand. So that's what we heard back from our members. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Our next question comes from Michael Kupinski with NOBLE Capital Markets. -------------------------------------------------------------------------------- Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [13] -------------------------------------------------------------------------------- Jim asked a lot of my questions and good questions, so I have just a few more. The question I have is even after travel restrictions are lifted, particularly here in the United States, it seems like the -- at least the experts are saying that the industry may recover in phases. And with consumers traveling more domestically, maybe doing more drives rather than airlines and -- than before they do international travel. First of all, do you agree with that? And then secondly, are -- as U.S. state restrictions kind of -- are they kind of affecting what the travel is in North America at this point? I was wondering if you could just give us a flavor between domestic bookings versus international. -------------------------------------------------------------------------------- Holger Bartel, Travelzoo - Global CEO [14] -------------------------------------------------------------------------------- Yes, Michael. Absolutely correct. We are hearing exactly that from our members, and we see it in their behavior. First trips they are taking is domestic, places they can drive to. Next step is trips within the U.S. or possibly to Hawaii or maybe to Mexico. And they are more comfortable with international travel to Europe and to Asia Pacific starting in fall, and for sure, for 2021. And we address that with our vouchers. All the vouchers that we have and the travel opportunities we have for trips to Europe and to Asia Pacific or long-haul trips, all of these offers are valid at least until 2021. In fact, we had even a couple that were valid until 2022. There was one offer that we negotiated for our members in the Maldives, which broke every record of any deal that we have ever supplied to our members. So who would have thought how comfortable members would be to travel and purchase a trip to the Maldives, so we were quite surprised with that, in a positive way. And then keep in mind, we are a global business. We're not only in the U.S., so we also operate in Europe. We have a lot of members in Europe. And within Europe, starting July 1, people can travel around again, everywhere. So travel restrictions are lifting everywhere. But since our model is based on planning future trips, it's something that doesn't even impact us that much right now. -------------------------------------------------------------------------------- Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [15] -------------------------------------------------------------------------------- Well, the Maldives offer was compelling. But anyway, in terms of... -------------------------------------------------------------------------------- Holger Bartel, Travelzoo - Global CEO [16] -------------------------------------------------------------------------------- Did you buy it? -------------------------------------------------------------------------------- Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [17] -------------------------------------------------------------------------------- No, I didn't, but it was very tempting. I wish -- I don't take vacations that frequently, so I wish I could. But in terms of the domestic versus international, is there any particular -- I guess, is there -- do you make more money on international? Or how -- I'm just trying to understand the -- if that -- it doesn't really make that much difference to you that if the consumers are actually traveling more domestically? -------------------------------------------------------------------------------- Holger Bartel, Travelzoo - Global CEO [18] -------------------------------------------------------------------------------- Yes. And there's no difference for us. You will see if you look at the Top 20 -- if you look at the Top 20 this month and compare it to 3, 4 months ago, you will find in every country where we publish the Top 20, we'll find much more domestic offers. So we can very easily adopt and adjust to that. -------------------------------------------------------------------------------- Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [19] -------------------------------------------------------------------------------- Got you. And one of the big opportunities for you, and which could be a significant growth opportunity for you is the Jack's Flight Club. I was wondering if you could just give me a sense of the benchmarks you hope to achieve now that you've introduced this to the U.S. in the second quarter and whether or not, just kind of in general, whether you're seeing subscription take rates that are encouraging. It would seem to me like it would be kind of a tough time to launch something like this, but I've been wrong before. So what are your thoughts about the subscription business in the U.S. at this point? -------------------------------------------------------------------------------- Holger Bartel, Travelzoo - Global CEO [20] -------------------------------------------------------------------------------- Yes. Yes, very interesting. And sometimes things are counterintuitive to or have been counterintuitive to what you think. So Jack's Flight Club started in the U.K., and 90% of their subscribers are in the U.K. Now this quarter, they have launched in the U.S. And one beauty of that business model is, of course, that it's a subscription service. So while travel -- I mean, we're not a travel company, but while travel companies' revenues really nosedived, Jack's Flight Club is continuing to charge subscription fees to their members. So it's a very attractive model. And we were surprised ourselves in April when our members told us, I want to use this time that I'm stuck at home to travel -- to plan future trips. So the information that Jack's Flight Club provides was actually very important to them during that time. And right now in the U.S., when you look at airfares, you see a lot of sales, you see great airfares, you see amazing airfares, you see high airfares. They change as quickly as we have never seen before. So the timing to launch this service in the U.S. is, to some extent, the best ever because now we see -- we saw a deal to -- from New York to Curacao for $50 round trip. We alerted our members. Within literally 1 hour, it had sold out. So I think members and consumers are very eager to get that kind of information. So we believe there's a good opportunity to introduce this service right now, maybe even better than it was half a year ago. So -- but the future will tell. -------------------------------------------------------------------------------- Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [21] -------------------------------------------------------------------------------- Got you. It's quite surprising that you are doing so well in the second quarter. I was kind of prepared for something a little bit far worse. Could you just kind of give us a sense of the revenues impact in the quarter? I know that you've indicated that you're cutting expenses significantly. I was just wondering, can you maybe even frame the level of expenses that you've cut, whether or not those -- how much of that is permanent versus temporary? If you can just kind of give us a sense of that. -------------------------------------------------------------------------------- Holger Bartel, Travelzoo - Global CEO [22] -------------------------------------------------------------------------------- Well, look, revenues in Q2 will clearly be down. No doubt about it. But compared to many other companies, we think, as you said -- and thanks for your compliment, we indeed have fared much, much better than a lot of other companies. Lisa explained why our results for Q1 came late. For Q2, we don't see this happening again. So our goal is to provide results for Q2 much more quickly after the quarter end, and then you will have more insights. On the expense front, I would say that a lot of the reductions, particularly in the area of staff costs and marketing, which are our 2 main expenses, marketing went down by almost 100% staff, and expenses probably by more than 50%. So there are significant decreases. And as we said in the presentation, we are now building a long-term structure to run this business profitably again, as quickly as we can. We would like to reach profitability again before the end of this year. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Our next question comes from Ed Woo with Ascendiant Capital. -------------------------------------------------------------------------------- Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media [24] -------------------------------------------------------------------------------- My question is have you seen any significant differences in how the travelers or consumers react in Europe or versus the U.S., particularly in (inaudible) that maybe were hit earlier, like Spain and Italy, versus some of the regions that are getting hit a little bit later, like in the U.S.? -------------------------------------------------------------------------------- Holger Bartel, Travelzoo - Global CEO [25] -------------------------------------------------------------------------------- Hi, Ed. It's a really interesting question, and the simple answer is it's almost exactly the same everywhere. As we said earlier, first, smaller domestic trips, then more trips with shorter flights and then longer trips down the road. The only difference you see is that in the U.S., consumers were more optimistic a little bit sooner. Next was Germany, where restrictions were relieved more quickly than in other countries because Germany was not as much affected. And then U.K. and Spain and France followed last. So -- but same patterns everywhere. -------------------------------------------------------------------------------- Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media [26] -------------------------------------------------------------------------------- Great. And then the other question is you're hearing a little bit, particularly in the U.S., about resurgence in cases and possibly in some places, talk about lockdown. Have you noticed any change in consumers' behavior slowing down within the past couple of weeks? -------------------------------------------------------------------------------- Holger Bartel, Travelzoo - Global CEO [27] -------------------------------------------------------------------------------- No. In fact, in the past couple of weeks, we saw even a better response for members. But I think that is simply a result of the flexibility that our deals are offering, and that's exactly what the members appreciate, that no one knows about the future. And the product we have allows them to lock in a deal and book it worry-free because if anything happens and any closures happen again, they will not be affected negatively. -------------------------------------------------------------------------------- Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media [28] -------------------------------------------------------------------------------- Great. And then my final question is on Jack's Flight Club. Obviously, you mentioned that you launched it recently in the second quarter in the U.S. When all the airlines have stopped flying, you didn't notice any big attrition in terms of your customer base, subscriber base with Jack's Flight Club? -------------------------------------------------------------------------------- Holger Bartel, Travelzoo - Global CEO [29] -------------------------------------------------------------------------------- The attrition rates over that last 3-, 4-month period was pretty much the same as it was before. So no difference there. We didn't see during that period as many new sign-ups as we would have seen before, but that is also now changing. And in the U.S., we haven't really begun introducing Jack's Flight Club to our members. We will do that starting in the next couple of weeks. And as I mentioned earlier, I'm quite optimistic that this is a good time to introduce this service to more and more consumers in the U.S. -------------------------------------------------------------------------------- Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media [30] -------------------------------------------------------------------------------- Yes. You're definitely correct about the prices being a lot more volatile and definitely a lot more discounted, but are there any concerns as airlines either go out of business or significantly reduce their flight schedules? -------------------------------------------------------------------------------- Holger Bartel, Travelzoo - Global CEO [31] -------------------------------------------------------------------------------- We will see. But if you look around, the airline industry has received massive support from government. So I think the very weak ones have gone out of business already, and the ones that are still around have bolstered themselves a good cushion. And we will see. But firstly, I'm much more optimistic about the airline industry than probably the consensus that is out there. People -- what we are hearing day after day after day after day, people are tired of just staying at home. And if you are not able to go anywhere for 3 months, that just creates even more interest in trips down the road. Imagine you're in a diet for 3 week -- for 3 months. That makes you even want more and more after that to go out and eat again. That's simply what it is. People want to travel. -------------------------------------------------------------------------------- Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media [32] -------------------------------------------------------------------------------- That's good. Well, congratulations on the stronger start to the second quarter. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Our next question comes from Steve Silver with Argus Research. -------------------------------------------------------------------------------- Steven Silver, Argus Research Company - Analyst [34] -------------------------------------------------------------------------------- Congratulations on the resiliency of the business. And the second quarter outlook is very impressive, considering everything going on in the world. Most of my questions have been answered as well. The one that you maybe didn't touch upon on the call was really the sale of the Japan business and the licensing agreement that came out of that. I was hoping you could just touch upon the financial implications for the company moving forward. The press release mentions that Travelzoo does maintain ownership of the member base from the legacy business. I was just trying to get a sense as to the economics of the deal and perhaps if Travelzoo does participate in any way in the future, as that membership base would grow under the new relationship. -------------------------------------------------------------------------------- Holger Bartel, Travelzoo - Global CEO [35] -------------------------------------------------------------------------------- Yes, Steve. I think it's a very positive and attractive agreement for us. We retain ownership of key assets, while at the same time, obviously, eliminating any risk from any performance in Japan. So according to the license agreement, Travelzoo Japan K.K. obtained a license to use the intellectual property of Travelzoo. So that's the trademarks, the software, the processes, et cetera. And that's exclusively for Japan. And in exchange, we receive a royalty payment, which is based on the achievement of certain net revenue targets. So that's in a nutshell what the agreement is about. Great. Thank you, everyone. So back to the operator then. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Please stay safe, and have a nice day.