Participants

Jeff Hoffman; Controller, Hotels; Travelzoo

Holger Bartel; Global Chief Executive Officer; Travelzoo

Christina Ciocca; Chairman of the Board, General Counsel, Corporate Secretary, Head of Global Functions; Travelzoo

Theodore O'Neill; Analyst; Litchfield Hills Research, LLC

Michael Kupinski; Analyst; Noble Financial Capital Markets

Patrick Sholl; Analyst; Barrington Research Associates

Ed Woo; Analyst; Ascendiant Capital Markets

Steve Silver; Analyst; Argus Research Corporation

Presentation

Operator

Good morning and welcome to the Travelzoo first quarter 2025 earnings call.
Today's conference is being recorded. Currently all callers have been placed in a listen-only mode, and following management's prepared remarks, the call will be opened for your questions.
(Operator Instructions)
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 1,995.
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 forms 10K and 10Q 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 company's investor relations website at Travelzoo.com/IR.
Now it is my pleasure to turn the floor over to Travelzoo's global CEO, Holger Bartel, its Chair, General counsel and CEO of Jack's Flight Club, Christina Ciocca and its financial controller North America, Jeff Hoffman. Jeff, we'll start with an overview.

Jeff Hoffman

Thank you, operator, and welcome to those of you joining us today. Today I'm stepping in for Lejeune, our Chief Accounting Officer. Please refer to the management presentation to follow along with our prepared remarks. The presentation in PDF format is available on our investor relations site at Travelzoo.com/IR.
Let's begin with slide 4. Travelzoo's consolidated Q1 revenue was $23.1 million, up 5% from the prior year and reaching the highest quarterly revenue since the pandemic. In constant currencies, revenue was $23.3 million, up 6% from the prior year. Operating income, which we as management call operating profit, decreased 34% year over year as we invested more in member growth. Q1 operating profit was $3.7 million, or 16% of revenue, down from$ 5.6 million in the prior year.
Slide 5 shows the strongest revenue growth came from our North America and Jack's Flight Club segments, while revenues in Europe increased 1% from the prior year. Operating profit decreased in both in both our North America and Europe segments and increased slightly in our Jack's flight clip segment.
On slide 6, we break down our categories of revenue advertising, membership fees, and other. Advertising revenue was $20.7 million for Q1 2025. Revenue for membership fees increased to $2.4 million. Membership fees begin to drive significant and incremental revenue growth. It will further accelerate.
In 2024, we introduced a membership fee for Travelzoo. Legacy members who joined before 2024 continue to receive certain travel offers. However, club offers and new benefits are only available to club members who pay the membership fee. Therefore, we are seeing many legacy members become club members over time, in addition to new members who join.
Slide 7 shows an example of membership fee revenue recognition. Travel revenue from membership fees is recognized variably over the period of subscription. Member acquisition costs, on the other hand are recognized in full at the time of the expense.
Slide 8 illustrates that as we grow members the differing recording of expenses and revenues creates a short-term negative impact on operating income. A continuous addition of new members every quarter increases quarterly revenue only over time. Particularly in the first quarter, that revenue number is even smaller as membership fees are prorated for any members who joined during the quarter. Marketing expenses are recorded immediately in each quarter. After a few quarters, quarterly revenue for membership fees exceeds the advertising expense, and the impact turns positive.
On slide 9, you will see that GAAP operating margin was 16% in Q1 2025. Our GAAP operating margin is lower simply because we have started to invest more. Our goal is to accelerate growth in numbers.
Slide 10 shows that in North America, the GAAP operating margin decreased to 24% and in Europe the GAAP operating margin remained flat at 3% for Q1 2025. This is driven by the investments in number growth, which occurs in all key markets. In Europe, this overshadows a great financial improvement in Germany, where we saw strong revenue growth year over year.
On slide 11 we provide information on non-gap operating profit as we believe it better explains how Travelzoo management evaluates financial performance. Q1 2025 non-GAAP operating profit was $4.3 million. That's 19% of revenue compared to non-GAAP operating profit of $6 million in the prior year period.
Slide 12 provides information about the items that are excluded in the calculation of non-GAAP operating profit.
Please slide, turn to slide 13. We repurchased 590,839 shares of the company's outstanding common stock. As of March 31, 2025, consolidated cash, cash equivalents, and restricted cash was $12.2 million.
Slide 14 shows how revenues compared to operating expenses most of the company's operating expenses, except for marketing, are relatively fixed in the short to midterm. We believe we can keep fixed costs relatively low in the foreseeable future. But higher investments in number growth are increasing total expenses. We expect these investments to accelerate revenue growth in coming quarters.
Now looking ahead, For Q2 2025, we expect year over year revenue growth to double. We expect revenue growth to accelerate as a trend in subsequent quarters, as membership fees, revenue is recognized readily over the subscription period as we acquire new members and as more legacy members become club members. Over time, we expect profitability to increase as recurring membership fee revenue will be recognized. In the short term, fluctuations in net income are possible because we might see attractive opportunities to increase marketing. We believe we expense marketing costs immediately.
Now I'm going to turn the discussion over to Holger.

Holger Bartel

Thank you, Jeff.
We will continue to leverage travels with global reach our trusted brand and the strong relationships with top travel suppliers to negotiate more club offers for club members. Travelzoo members are fluent, Active and they are open to new experiences. We inspire travel enthusiasts to travel to places they never imagined they could. Travelzoo is the must have membership for those who love to travel as much as we do.
Slide 15 provides more information about travel members 91% say they are open to new destinations and travel ideas. We are the club of travel enthusiasts.
Slide 17 provides an overview of management's focus. We are working to grow the number of paying members and accelerate revenue growth by converting legacy members and by adding new club members.
Add new benefits to the paid membership retain and grow our profitable advertising business from the popular TOP20 products. Accelerate revenue growth which drives future profits in spite of temporary lower EPS. Go checks flight clubs, profitable subscription revenue and develop travel through matter with discipline.
Now Christina will provide a quick update on Travelzoo and check flight.

Christina Ciocca

We continue to work on the production of the first Metaverse travel experiences. They will be browser enabled. As stated in previous earnings calls, we are conscious of developing travel to Meta in a financially disciplined way. We will provide additional updates in due time.
For Jack’s Flight Club, revenue increased 20% year over year, and the number of premium subscribers increased 13%. We continue to invest in growth more than half of the revenue earned in the quarter was reinvested into marketing and efficient number acquisitions. As with Travelzoo, we expect this to have a compounding effect over the course of the year, resulting in greater deferred revenue and increased profitability.
I'm now handing over to the operator for questions for Jeff, Holger and me.

Question and Answer Session

Operator

(Operator Instructions)
Our first question comes from Theodore O'Neill from Litchfield Hills Research. Please go ahead. Your line is open.

Theodore O'Neill

Thanks very much and congratulations on the good quarter and the outlook.
My question is this There's been in the press a lot of discussion of Foreign travelers not wanting to come to the US, and I was wondering how you see that in changes in behavior for travel plans coming from Europe, Canada, outside the US.

Holger Bartel

Yes, we are hearing this from our travel suppliers for us, as we said earlier, our travel enthusiasts are very flexible destinations. 91% say they travel wherever we think wherever they find a great offer and a great deal, so they simply travel to other destinations. So, while this is for sure a trend in the industry, for us it's not a negative because our members are very flexible. In fact, they love to travel to new destinations.

Jeff Hoffman

Thanks very much.

Operator

Michael Kupinski, Noble Financial Capital Markets.

Michael Kupinski

Thank you. North America performed better than Europe in the last latest quarter and was wondering if what was the driver dynamic of that. Was it domestic travel or international travel. And if it was international travel, is that due to the dollar or were there other factors at play there.

Holger Bartel

Look, Michael, in global groups like ours where we operate in different markets, they are just natural fluctuations, so I wouldn't overthink that the consolidation doesn't really give a full picture when you look into market specific numbers, for example, Germany had a very strong quarter revenue was up double digits year over year, very different from last quarter, as you might recall the UK was slightly lower in comparison to a very strong Q1 that we had last year. So, we just have these natural fluctuations, and we believe that Europe revenue will also catch up in its growth year over year in the following quarters.

Michael Kupinski

Got it. And just as a quick follow up, I know the numbers you had a very solid quarter.
I was just wondering though on the gross margins were a little lower than I expected. Can you just talk a little bit about the impact of the gross margins. Are those affected by the company's effort to develop a subscription business or were there other things at play in the quarter.

Holger Bartel

I just a couple of things, Michael. So, in Q1 we had a few opportunities to purchase distressed travel products from suppliers at a discounted price. This allowed us to create strong club offers and that in turn is what we leverage to attract new members, and it also makes it easier to convert legacy members to club members. And we just had to classify it in cost of revenue in this case. The other thing is temporarily but not very largely customer service also increased a bit year over year, which is no surprise because at the beginning when something new like there's a lot of legacy members who signed up for the club membership, so there are more questions at the beginning. So, we think this will go back to where it was before, but if it was a little bit higher than last year.

Michael Kupinski

Right, thank you. Congratulations.

Operator

Patrick Sholl, Barrington Research Associates.

Patrick Sholl

Hi, good morning, just on the, member acquisition front, can you maybe talk a little bit how.
I guess, yes, how Consumers who decide to become a member, what is sort of like the main driver is like a specific deal that you're presenting that they decide to, they want to become a member to access that deal or is its other aspects of your marketing effort.

Christina Ciocca

Sure, I can take that question. We are definitely seeing that our club offers, and our various kind of travel offers are the biggest straw of converting people into club members, but we have a whole kind of suite of benefits that That ties to the club membership including lounge access, a giveaway and other things like that. So, I think the main driver is the club offers right now, including in our member acquisition efforts but we do have quite a robust membership offering.

Patrick Sholl

Okay, and then just to maybe drill in on the topic earlier on the changing travel dynamics, could you talk about how that affects some of your efforts to source deals in certain markets.

Holger Bartel

Consumers and travelers in general are becoming a bit more hesitant, particularly in the US in the last 30 days because we all know a lot is going on, so they are a bit hesitant, but as we know from experience and as we saw in the last 30 days, the lower demand enables us to capture. A very strong offers from travel suppliers because ultimately, they want to fill their hotels, they want to fill their airline seats. They want to fill their cruise cabins. I spoke a few minutes ago about distressed inventory, so these are opportunities that make our offerings stronger and that stronger offering in turn attracts more travel enthusiasts to become members of the club.

Patrick Sholl

Okay, thank you.

Operator

Ed Woo, Ascendiant Capital Markets.

Ed Woo

Yes, thanks for taking my question. My question is it looks like there's less demand for people to come into the US. Are you seeing the same dynamics for people in the US to travel international? Is there less demand for that as well.

Holger Bartel

We see the first but not the second, so yes, we see a bit of hesitation in particularly Canadians. Canadians interest in coming to the US has decreased a lot, but we are not seeing the other way around, so Americans still love to travel to Europe.

Ed Woo

Great. Well, thanks for answering my questions, and I wish you guys good luck.

Holger Bartel

Sure, thanks, Ed.

Operator

Steve Silver, Argus Research Corporation.

Steve Silver

Thanks operator, and thanks for taking the question.
So, it looks like you guys became very aggressive over the course of the quarter in repurchasing shares. It looks like as the stock price corrected along with the broader market. I'm curious as to your thoughts on the balance sheet and the company's capacity and appetite to continue buying shares if the markets remain volatile over the near term.

Holger Bartel

The opportunity was very attractive last quarter, so since we are confident in our business and we had a lot of cash, we increased our share repurchases going forward. We expect the cash balance to increase again first because we collect membership fees at the beginning of the subscription period.
And second, the business is profitable and cash flow positive with relatively fixed operating expenses. And as you heard, we are quite confident right now in our member acquisition activities.
So, we now have a better opportunity to invest in member growth than we had maybe a year ago, and that's where we would like to allocate the positive cash that the business is generating.

Steve Silver

Great, Holger, thanks for the call.

Operator

Okay, this concludes the Q&A portion of today's call. I would like to turn the call back over to Mr. Holger Bartel for closing remarks.

Holger Bartel

Well, the investors, thank you very much for your time and support today. We look forward to speaking with you again next quarter. Have a great day.

Operator

This concludes today's travel due first quarter 2025 earnings call and webcast. You may now disconnect your lines at this time and have a wonderful day.
And we're now in private. Have a great day everyone.

Holger Bartel

Thank you.

Operator

You're welcome.