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

Michael Kupinski; Analyst; Noble Financial Capital Markets

Patrick Sholl; Analyst; Barrington Research Associates

Steve Silver; Analyst; Argus Research Corporation

Ed Woo; Analyst; Ascendiant Capital Markets

Presentation

Operator

Good morning, and welcome to the Travelzoo fourth quarter 2024 earnings call. Today's conference is being recorded. (Operator Instructions)
The company would like to remind you that all statements made during this conference call and presented in the slides constitute forward-looking statements and are made pursuant to 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 the 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 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 will start with an overview.

Jeff Hoffman

Great. Thank you, operator, and welcome to those of you joining us. Today I'm stepping in for Lijun Qi, our Chief Accounting Officer. Please refer to the management presentation to follow along with our prepared remarks, that is available on our investor relations site at travelzoo.com/ir. Let's begin with slide 4.
Travelzoo's consolidated Q4 revenue was $20.7 million, down 2% from the prior year. In constant currencies, revenue was $20.6 million. Operating income, which we management call operating profit increased 8% year over year.
Q4 operating profit was $4.9 million or 24% of revenue, up from $4.5 million in the prior year. While operating income increased an outstanding shares decreased, EPS was slightly lower compared to last year, and we'd like to explain why.
A year ago, extraordinary income from discontinued operations and relatively high other income from favorable FX trends added $0.05 to quarterly EPS. This year, a strong dollar at the end of 2024 led to negative other income and impacted EPS negatively. Without these effects, the EPS would be in management's opinion, better reflects the positive earnings strength.
Slide 6 shows a revenue increase in both our North America and Jack's Flight Club segments, while revenues in Europe were lower. This was caused primarily by fluctuations in Germany, which we do not view as a trend.
Operating profit increased in both our North America and Jack's Flight Club segments, but decreased in our Europe segment. On slide 7, we break down our categories of revenue: advertising, membership fees and other.
Advertising revenue was $19.1 million for Q4 2024. Revenue from membership fees increased to $1.6 million. We expect this revenue to grow substantially in 2025. 2024, we introduced a membership fee for Travelzoo. Legacy members who joined before 2024 were exempt from the fee during 2024.
The legacy members represent more than 95% of Travelzoo's reach. In 2025, legacy members continue to receive certain travel orders, but club offers and efforts. We generally see legacy members being excited to become club members.
Slide 8 shows an example of membership fee revenue recognition. Revenue from membership fees is recognized ratably over the good subscription, member acquisition costs, on the other hand, are recognized equal at the time of the expense. On slide 9, you can see our GAAP operating margin was 23% in Q4 2024.
Slide 10 shows that in North America, the GAAP operating increased to 33% for Q4 2024. On slide 11, we're providing information on non-GAAP operating profit as we believe it better explains how Travelzoo's management evaluates financial performance.
Q4 2024 non-GAAP operating profit was $5.4 million. That's 26% of revenue compared to non-GAAP operating profit of $5.2 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 turn to slide 13. Our solid cash position grew even after repurchasing 135,792 shares of the company's outstanding common stock. As of December 31, 2024, consolidated cash, cash equivalents and restricted cash was $17.7 million.
Slide 14 shows how revenues compared to operating expenses. Most of the company's operating expenses, except for marketing, are relatively that we believe we can keep the fixed costs relatively low in the foreseeable future.
Higher revenues would thus increase operating margin. Now looking ahead, in Q1 2025, we expect revenue to increase at a higher pace. The pro rata portion of membership fee revenue will already have 5% incremental growth this quarter.
This percentage is expected to increase over subsequent quarters as membership fee revenue is recognized. We acquired new members and more legacy members become club members. For the whole year, we expect substantially higher revenue growth. Over time, we expect profitability to further increase as recurring membership fee revenue will be recognized.
I'll now turn the discussion over to Holger.

Holger Bartel

Thank you, Jeff. We will continue to leverage Travelzoo's global reach, our trusted brand and strong relationships with top travel suppliers to negotiate more club offers for club members. Travelzoo members are affluent, active, and open to new experiences. We inspire travel enthusiast to travel to places they never imagined they could. Travelzoo is the must-take membership for those who love to travel as much as we do.
Slide 15 provides more information about Travelzoo members. 91% said that they are open to new destinations and travel ideas. The other club of travel enthusiasts. Slide 17 provides an overview of management's focus.
We are working to grow the number of paying members as we continue to convert legacy members and add new club members, add new benefits to make paid membership even more valuable and grow our profitable advertising business from the popular Top 20 product, utilize higher operating margins to increase EPS.
Grow Jack's Flight Club profitable subscription revenues and develop Travelzoo META with discipline. Now Christina will provide a quick update on Travelzoo META and Jack's Flight Club.

Christina Ciocca

Thank you, Holger. We continue to work on the production of the first metaverse travel experiences. They will be browser-enabled and conscious of developing Travelzoo META in a financially disciplined way. We will provide additional update in due time. Jack's Flight Club in 2024 expanded the team and increased marketing spend.
We increased premium members. We also grew revenue 19% year over year. We continue to generate operating profit. We are well positioned for 2025 to continue this growth trajectory with a focus on further penetration of both the Canadian and US markets.
I'm now handing over to the operator for questions for Jeff, Holger and me.

Question and Answer Session

Operator

(Operator Instructions) Michael Kupinski, Noble Capital Markets.

Michael Kupinski

My question is really related around the subscriptions. I was wondering if you can give us some color on the added value that you're offering for the subscriptions the pricing and maybe on the experience so far that you've had with your subscription, how many legacy members do you anticipate to convert to subscriptions? And any other additional color that you can give us about how your advertisers are viewing the subscription offerings and how that is being balanced, I guess, with your legacy advertising partners.

Holger Bartel

Michael, yes, that's a bunch of questions. So let me start off the membership. It's a 12-month membership in the US. It's $40. In the other markets, it's around the same in local currency.
And what we receive for that is really all the Travelzoo offers and in particular, we have started producing club offers, which are offers that only those who pay for the membership have access to. We just came off the last couple of days, our first member days, member days is a event 4 times a year, where we have special offers, exclusive offers for our club members.
And those were really quite amazing. I would say we had, for example, London Hotels for $99, unheard of. It's a four-star hotel, centrally located, very, very well. We do have TripAdvisor.
Then a Europe trip with flights for $299. We had countryside escape in the UK for GBP99 with dinner and hotel and breakfast. I mean, quite unbelievable. That's what -- I'll just give you examples because that's what's attracting both new members as well, legacy members to convert. How's it going so far?
Well, it's all going according to our plans, and it's in line with expectations. We don't release the specific number, but we had a good number of legacy members who already converted to paying members before the end of last year.
And as we are introducing these club offers and additional member benefits, which are exclusive to the members, this motivates legacy member conversion over the current quarter and over the future. We also see the results in member acquisition.
We have all built a robust model that allows us to acquire new members at a cost that works for us. So now we have started scaling in Q1, for example, already on pace to acquire more new members for marketing than we did entire last year.
So we are seeing more growth. And then lastly, I think you asked about the advertising business. Our advertisers continue to reach the travelers that they used to reach in the past. So certainly, there's a lot of questions about what's going on, but they are also reached the same people and actually even more people than in the past. And one thing we're also learning is those that switch to the paid membership model are much more active and much more almost glued to receiving our emails and top trends.
It's a little bit like, for sure, when you pay for a sudden things, you want to take advantage. So the responding both in terms of activity, click levels, purchases that we are seeing from those who have become members of Travelzoo are quite impressive compared to what we saw before.

Michael Kupinski

Just a follow-up. You indicated that there will be an incremental $8.3 million, I think, or 5% of revenue growth from subscription in the first quarter. Can you talk about the current differences between North America and Europe? Outside of the subscription.

Holger Bartel

I would say the US people -- I mean in the US, the economy is doing quite well. There is now more uncertainty from a political perspective and particularly to what it means for consumers very budget-conscious travelers are a bit hesitant from what we are seeing, but that's not really our member base.
Our member base is more affluent. As we saw earlier from the chart, and higher-end and luxury travel in the US and in Canada is still doing quite well. In Europe, I would say, we see a little bit more hesitation on consumer side, but that, as I always say, that's good for us because if all hotels in London were full, we certainly wouldn't offer a $99 room night at the century located four-star hotel for our highly valued Travelzoo members.
They wouldn't do that. So happy that this -- it was almost a craziness of what we saw our after COVID, I mean we call the [rent] travel. And all travel companies were so busy. That has certainly ebbed, and that's good news for us.

Operator

Patrick Sholl, Barrington Research.

Patrick Sholl

I also was wondering if you could maybe talk about like the continued engagement levels of like of the numbers that haven't joined club. And what, I guess, has been what tends to encourage them to join. I guess just what share of those numbers joined ahead of year end? And maybe just talking about like if you could talk a little bit about who has how many have joined since the start of the year.

Holger Bartel

So we don't -- that we don't see much of a change in the behavior of the ones that have not become pay members yet. Click rates are still -- on click rates per email are still fairly similar to what we saw last year. And we're not specifically releasing information how many members have converted. We don't want to talk about that.
But what I can tell you is that we are currently on pace that at the end of Q1, we will have 50% more pay members than we had at the end of last year, and that focus in one quarter is good for us and makes us happy.
But maybe, Christina, you can speak a little bit about what motivates legacy members to become members -- paying members because they have more than just the offers, there's a whole range of things that they benefit from. Christina, do you want to speak about that for a minute?

Christina Ciocca

Sure. In addition to the offers, which we really believe are the core of the membership and the service -- the great service that we've always provided of researching and vetting the offers and identifying these offers.
We're also adding other benefits. In Q4, we added lounge access for delayed flights, and saw quite a good response, both from legacy members who are interested in that benefit and also from those external to Travelzoo.
We've also launched a weekly give away where club members have the opportunity to win, to be randomly selected to select any top 20 offers that they would like to take for free. In addition to that, we've been building out our member services and have priority member services for club members, and we're excited to potentially add additional benefits as the year progresses.

Patrick Sholl

Okay. And then you had mentioned weakness in Germany. I guess, can you maybe talk about why you feel that, that was more of a one-off? And maybe just additional commentary around that around Europe and the ad market there. And then are there like any marketing expenses that you're pulling back on in order to market the paid service.

Holger Bartel

Great. So Europe, we were not happy with Europe in Q4, very clearly. And we were disappointed, particularly with Germany. But the fluctuations were a result of many factors. So just some example, some destination advertising did not run as plan, some revenue got delayed.
Cruise advertising was lower than on top of that, on the accounting side, we have the higher true-up of annual breakage revenue. We have to do that once a year. It's a true-up versus estimates that came in higher than what we expected because more people use their vouchers.
And then look, the political turmoil in Germany in Q4 where the government resigned, they just had elections last weekend. All of that didn't help either many consumers and travel companies went into a holding pattern. And as you see just all these things came together all at once. But as we said earlier, we don't see that as a trend that we'd worry us at this time.

Operator

Steve Silver, Argus Research.

Steve Silver

And congratulations on reaching a positive net cash. Looks like this quarter, the cash in pacing the merchant payables for the first time since the pandemic. So congratulations to you guys, have been working on that for several years now.
The question is, with the expectation of significant ramping in revenues expected over the course of 2025, whether this might have any read-through to your ability to ramp growth investments like META while still maintaining discipline. I know you guys have been active in repurchasing shares. Just curious as to whether the ramp in revenues will allow you to increase growth investments as well.

Holger Bartel

Well first, thanks for pointing out the positive development in our balance sheet, Steve. And now actually, Pat also asked about marketing, whether we are planning to spend more. And yes, we are. We are in 2025, we will wrap up marketing spend. We are doing that in Q1.
Why? Number one, we have found a model that works, okay? So if we can acquire paying members at a reasonable cost and we benefit from them over a long period of time. The renewal rates so far that we are seeing -- we are happy with them. Then of course, we invest because it's a smart decision for the business to do that.
And second, as revenues increase and as we were trying to explain earlier, at 5% incremental revenue growth we are seeing in Q1, that number will continue to go up throughout the year because the subscription revenues are only recognized over the course of the 12 months.
So it's a little bit difficult to really conceptualize that, but that's why we are already happy with what we are seeing in Q1. Will that affect investment in META in Jack's Flight Club. No, we look at this quite independently, we develop in META with quite some discipline.
We're not still spending millions and millions of billions of dollars on developing that metaverse experience would rationally. And we don't see that this is affected, particularly as our balance sheet improving and we are generating more cash flow this quarter or cash flow in Q4 as you saw was among the highest we have seen in quite some time.

Operator

Ed Woo, Ascendiant Capital.

Ed Woo

Congratulations on the quarter. I had a question on the Jack's Flight Club membership and the Travelzoo Club membership. Are they separate products? And are there any plans to combine them so that you have one membership for both products?

Christina Ciocca

Thank you, Ed. I can take that question. For now, we try and that includes memberships. We since we've acquired Jack's Flight Club, we look for ways to find synergies between the two businesses, and that includes some cross-promotion and of both the membership and the content identified by either Travelzoo or Jack's Flight Club.
And we're doing that in a way that makes sense and it's beneficial for both brands, and they serve a slightly different market. So for now, that's the plan is to keep some independents.

Operator

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

Dear investors, thank you for listening for your time and support. We look forward to speaking with you again next quarter. Have a great day.

Operator

This concludes today's Travelzoo fourth quarter 2024 earnings call and webcast. You may disconnect your lines at this time, and have a wonderful day.