Q2 2023 Travelzoo Earnings Call
Participants
Arveena Ahluwalia; Global Director of META; Travelzoo
Holger Bartel; Global CEO & Director; Travelzoo
Lijun Qi; Finance Director & Principal Accounting Officer; Travelzoo
Edward Moon Woo; Director of Research and Senior Research Analyst of Internet & Digital Media; Ascendiant Capital Markets LLC, Research Division
James Charles Goss; MD; Barrington Research Associates, Inc., Research Division
Patrick McCann; Generalist Research Analyst; NOBLE Capital Markets, Inc., Research Division
Steven Silver; Analyst; Argus Research Company
Presentation
Operator
Hello, everyone. Welcome to the Travelzoo Second Quarter 2023 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 the forward-looking statements. Factors that could cause actual results to differ materially from those in forward-looking statements are described in the company's Forms 10-K and 10-Q and other SEC filings.
Unless required by law, the company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the company's website for important information, including the company's earnings press release issued earlier today. 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 Finance Director, Lijun Qi; and its General Manager, Travelzoo META, Arveena Ahluwalia.
Lijun will start with an overview of the second quarter 2023 financial results.
Lijun Qi
Thank you, operator, and welcome to those of you joining us today. Please refer to 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 #3.
Our consolidated Q2 revenue was $21.1 million, up 19% from $17.7 million in the previous year. In constant currencies, revenue was $21.2 million, which is an increase of 20% year-over-year. Operating income, which weighed as management call operating profit increased 84% year-over-year. Q2 operating profit was $3.3 million or 15% of revenues, up from $1.8 million in the prior year. As of June 30, 2023, we had 30.8 million unduplicated members compared to 30.7 million as of June 30, 2022.
Slide 4 shows that revenue growth accelerated, particularly in Europe and at Jack's Flight Club. Year-over-year growth rates were higher this quarter in all business segments when compared to growth in the previous year. On Slide 5, we go into more detail about the revenues and the operating profit of our 2 largest business segments, North America and Europe.
North America segment revenue increased $1.8 million from $12.4 million to $14.1 million. The operating profit in North America was $3.8 million in Q2 compared to an operating profit of $3.3 million a year ago. Europe segment revenue increased $1.5 million from $4.4 million to $5.9 million. Europe had an operating loss of $239,000 in Q2 compared to an operating loss of $1.5 million in the prior year. On Slide 6, you can see that our operating margin reached 15% in Q2, up from 10% in the same period last year. The operating margin of 15% in Q2 2023 is much higher than before the pandemic.
Before the pandemic, Travelzoo's reported operating margin was much lower because of losses from our Asia Pacific business segment. In March 2020, Travelzoo decided to make Asia Pacific a licensing business going forward. Now the operating margin shows the true profitability of Travelzoo in North America and Europe.
Slide 7 shows that in North America, the operating margin reached 27% for Q2. On Slide 8, we provided information on non-GAAP operating profit as we believe it better explains how Travelzoo evaluates performance. Q2 2023, non-GAAP operating profit was $4.1 million compared to a non-GAAP operating profit of $2.6 million in the prior year. Slide 9 provides more information about the items that included in the calculation of non-GAAP operating profit. Please turn to Slide 10. As of June 30, 2023, consolidated cash, cash equivalents and restricted cash was $20.2 million. Our cash balance remains unchanged. Merchant payables decreased by $4.0 million.
Slides 11, 12, detail our revenues by business segment (technical difficulty)
Operator
[Sorry] for interruption The speaker has disconnected. One moment.
Holger Bartel
I can continue on Slides 11 and 12 detail our revenue by business segment. The North America business segment saw a year-over-year revenue increase of $1.8 million. Turning to Slide 12. The Europe business segment saw a year-over-year revenue increase of $1.6 million. Slide 13 shows how revenue is compared to operating expenses. Most of the company's operating expenses, except for marketing are fixed in the short term or midterm. We believe we can keep fixed costs relatively low in the foreseeable future while revenues are expected to grow. For Q3 2023, we currently expect growth in revenue and growth in operating income to continue year-over-year.
Let's turn to the next slide. Year-over-year revenue growth accelerated from the first quarter to this quarter. We will continue to leverage Travelzoo's global reach, trusted brands and our strong relationships with top travel suppliers to negotiate more exclusive offers for Travelzoo members. With more than 30 million members, 8 million mobile app users and 4 million social media followers, Travelzoo is loved by travel enthusiasts who are affluent, active and open to new experiences. Slide 14 provides more information about Travelzoo members. 87% say they are open to new destinations and travel ideas. Travelzoo members are indeed true travel enthusiasts. Slide 16 provides an overview of what management and our global team are focused on. We want to reach and surpass pre-pandemic number of members and accelerate revenue growth, utilize higher operating margins to significantly increase EPS, grow Jack's Flight Club's profitable subscription revenue and develop Travelzoo META with discipline.
At this point, I'd like to turn over to Arveena.
Arveena Ahluwalia
Hello, everyone. Please turn to Slide 19 for an update on the new Travelzoo META service. We opened for founding membership in Q2 2023. The website is meta.travelzoo.com. We are accepting 1 million founding members. Founding members are the early adopters of Travelzoo META who will play a pivotal role in shaping the future of travel in the Metaverse. Founding membership is a onetime fee of $20. Each founding member will be entitled to one of the world's first personality-based emotionally-driven Travel Companions, NFTs from an interactive gallery. No 2 travel Companions are the same. Only founding members will also receive an exclusive first year annual subscription rate and sneak peek at the first upcoming beta Metaverse travel experiences.
Please turn to Slide 20 through 23 to see a snapshot of the founding members only interactive gallery. On Slide 24, you can get a glimpse of the travel companion. I'm handing over to the operator for questions for Holger, Lijun and me.
Question and Answer Session
Operator
(Operator Instructions) We'll take our first question from Jim Goss with Barrington Research.
James Charles Goss
Great. I appreciate the opportunity. One thing I'm very focused on is the cost structure because I think that was a key advantage and opportunity you had coming out of COVID to maybe rightsize the cost structure. And I wanted to ask if you think it's where it needs to be right now? Or do you think it will be able to rise -- increase in certain areas? And how things match up between U.S. and Europe?
Holger Bartel
Jim, as we said earlier, we believe that our fixed costs are relatively stable, and they will remain stable for the next few quarters. We believe so. We have some opportunity to decide how much we would like to spend on marketing. This quarter, we had great opportunities in the U.K. and for Jack's Flight Club to spend a little bit more on member acquisition. And that's why costs are a little bit up versus the previous quarter. But in general, we believe they will remain at the current level for the foreseeable future.
James Charles Goss
Okay. A couple of other things. One is, I was wondering what you might think of in terms of margin profile overall or U.S. versus Europe, given that you have been able to take advantage of leveraging the fixed cost structure and where you think you might be able to rise to at whatever you think of as a maturity level. And maybe even how long it might take to get there?
Holger Bartel
We believe that for the company overall operating margins can go higher. You see that the operating margin in North America has been around 30%. Europe is far behind that, but as Europe is catching up, the operating margins in Europe, we expect them to increase as well. And we believe that we can -- for the company as a whole can reach overall similar levels of what we are seeing in North America.
James Charles Goss
Okay. And maybe 1 last grouping. Jack's Flight Club seemed like it was a great opportunity. The ROI is immense so great to this point. I'm wondering what your objectives might be with Jack's Flight Club. And if you feel there are any subscription opportunities you've been able to enjoy with Jack's Flight Club that you might apply to the overall operations, the core business.
Holger Bartel
Yes. We're happy with Jack's Flight Club right now. We finally, after coming out of the pandemic, we finally see members increasing. In fact, paying subscribers were up 30%. You don't see that yet in the revenues because revenue gets reported delayed. And so we're quite optimistic about Jack's Flight Club and the contribution it can make to the company overall.
James Charles Goss
And in terms of using a subscription model in the core business, is that still not the best idea.
Holger Bartel
Yes, it's something we are looking at for sure. We are doing some tests. And at the appropriate time, we will update you and investors about what we are planning to do.
Operator
Next, we'll go to Ed Woo with Ascendiant Capital.
Edward Moon Woo
There's been a lot of buzz even in the travel industry about AI and machine learning. Are Travelzoo doing anything in that area?
Holger Bartel
Ed, it's actually something that we have been looking at for quite a while before it even became such a buzzword recently. And yes, we indeed an initiative underway to leverage AI in a couple of areas of our business.
Edward Moon Woo
Great. Is there anything you could talk about? Or is it something that you're going to wait until the time is right to discuss?
Holger Bartel
It's the second. We would like to wait until it's time to discuss also we don't really would like -- we don't really want to inform our competitors and others what we are planning to do.
Edward Moon Woo
Great. Well, it's glad to hear that you guys are also involved in this. And then my next question is on META. You said that the launch has happened in the second quarter and you got 1 million members with graduations. Is that on track with what you guys are expecting? And do you guys have formal expectations for what number you'll be maybe by the end of this year?
Holger Bartel
Arveena (inaudible)
Arveena Ahluwalia
Thanks Holger. Ed, so yes, as I've been mentioning in the previous calls, we are building Travelzoo META in phases with -- in a very disciplined manner. So we did launch our founding membership phase, which you can be in meta.travelzoo.com in Q2. And while we cannot disclose any data as yet because as you can imagine, we are trying to be the first movers of the data is confidential. We are highly encouraged by the quarterly results. And I do look forward to sharing that with you in due time.
Operator
Next, we'll go to Steve Silver with Argus Research.
Steven Silver
First, I want to congratulate you guys on the continued progress in the balance sheet. It's nice to see that the merchants payables continue to come down at a significant rate while the cash is being maintained. I guess my main question is just how you're thinking about the recovery in the business, particularly in Europe, given the fact that you've mentioned on the last few calls that Europe is lagging behind North America in terms of the operating margin you're getting in each place, but yet the company was able to issue a new share repurchase plan. So just trying to get a little bit more color in terms of what you're seeing out of Europe in terms of what you're seeing out of Europe in terms of that gives you the confidence that the operating margin will continue to recover, I guess, just that way, supporting the share repurchase plans.
Holger Bartel
Yes, great, Steve. We are indeed very happy with the improvements in the balance sheet. Thanks for noticing that. If you compare our balance sheet to 1 year ago, it has improved very much indeed. And we were able to do so because we executed exactly what we've been saying for the last year, which is we want to accelerate revenue growth. We want to increase operating margins. We want to increase EPS. We want to improve our balance sheet. We want to grow Jack's Flight Club's profitable subscription revenue and we are seeing all of this happening.
So we are actually quite happy, and we are also very pleased with the second quarter. Revenue growth overall is -- has -- is higher than Q1. It has accelerated over what we saw last year. So we have very good momentum coming out of the pandemic. When it comes to Europe, one should not look at just the absolute numbers. Yes, the revenue is the same in Q2 as it was in Q1, but the growth rate year-over-year is now 35%. So finally, Europe is also getting that momentum. And as we said, with the delay, we expect it will also reach pre-pandemic levels when -- as we continue on this course. So we are quite pleased with.
And then your -- what was your third question? It was related to the share repurchase.
Steven Silver
Yes. In terms of how the recovery will get there, yes.
Holger Bartel
Yes, the recovery is fully on track. The profitability of the company is higher than it has ever been. We are generating lots of cash, and that gave us an opportunity to repurchase already last quarter. A fairly large amount of shares. And we also think we have that opportunity going forward to repurchase more shares. That's why we announced the share repurchase program yesterday.
Operator
Next, we'll go to Patrick McCann with NOBLE Capital Markets.
Patrick McCann
This is Pat for Mike Kupinski. My first question is if there's any particular impact from economic weakness as it relates to consumers' travel budgets. There might be the appetite for travel, but are consumers reducing how much they're spending. Have you seen any anything on that, any impacts to the business? Yes, I guess I'll leave it at that for my first question.
Holger Bartel
Yes, we are indeed seeing a trend that demand publicly for hotels is weakening. You probably hear that airlines and planes are quite full, but that's also a result of significantly reduced capacity. But what we are hearing from hotels in both North America and Europe, and particularly on the higher end is that the bookings they are receiving this year are not as strong as what they had last year. The start of the year was quite strong. And so they all expected business would be very, very good, again, even better than in the summer of 2022, but that hasn't happened to the level of expectations. This is good for us because more hotels and other travel providers are coming to us and work with us to create these specific offers that are motivating our 30 million members to take additional trips go some places where they didn't plan to and travel more. So, yes, we see this trend -- the strong -- this trend of very, very strong travel demand coming out of the pandemic. We see it weakening and as I said, it's actually good for us. I believe in the second half of the year, we will have even better opportunities to create exclusive offers for our members.
Patrick McCann
Sure. And kind of piggybacking on that. Are people booking any closer to the dates as far as closer or further away from the travel dates, has that trend -- has that been trending in one direction or another as that -- as demand has weakened?
Holger Bartel
Well, we are not an online travel agent. So we are not the booking side. However, we, of course, hear from our partners what they are seeing. What happened this year is that people were more comfortable to book in advance. That's why I earlier said bookings at the beginning of the year for summer travel were quite strong. That's different from last year. because last year, people were booking more last minute. So what we are hearing is that the booking window is going back to what it was before the pandemic. So in general, we see a lot of normalization.
Patrick McCann
Got you. And then I also just wanted to touch on META -- Travelzoo META quickly. Is -- are there any milestones we can look for going forward? Anything we can kind of -- yes, anything we'd look for.
Arveena Ahluwalia
So I can take that. So we -- at this point, like I just mentioned, we did launch our founding membership phase, and we do have milestones we're tracking. But again, it's a little too early to disclose, especially given we're attempting to be the first mover. But as and when we approach those milestones, we will update everyone.
Patrick McCann
Okay. And yes, congrats on the solid quarter.
Holger Bartel
So look Pat, we are very excited to be in this industry. It's a great industry to be in because what the pandemic show to people is that it is essential that they would like to leave home and they want to travel. So I think the interest in people to travel is higher than it ever was before the pandemic yet, of course, the inflation and potential economic weakness is putting stress on people's process and it also creates openings in the travel industry, where we come in, and we help the travel companies to drive demand into areas where there was less demand and also or a period when there is less demand on this periods. And in this way, we are creating incredible offers for our members that get them to travel more and really fulfill that desire to get away and learn more about new culture. So we're in a good spot, and we are very excited. And it's a good place to be in. But thank you very much.
Operator
And I show, we have no further questions at this time. I'll now turn the call back over to Mr. Holger Bartel for any additional or closing remarks.
Holger Bartel
So dear investors. So thank you for your time and support. We look forward to speaking with you again next quarter. 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.
