Travelzoo (TZOO) Earnings Call Transcript

Hello, everyone. Thank you for joining us, and welcome to the Travelzoo Third Quarter 2026 Earnings Call. After today's prepared remarks, we will host a question-and-answer session. [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 Legislation 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 call will be made available on the company's Investor Relations website at travelzoo.com/ir. You can also download a copy of the Q3 presentation in the bottom right-hand corner of your screen. Now it is my pleasure to turn the floor over to Travelzoo's Global CEO, Holger Bartel its Chair, Chief Membership Officer and General Counsel and CEO of Jack Slight Club, Christina Ciocca, and its Financial Controller, North America; Jeff Hoffman. Jeff will start with an overview.

Thank you, operator, and welcome to those of you joining us. Today, I'm stepping in Biljon, 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. We Revenue increased again year-over-year. Consolidated revenue was $22.9 million, up 3% year-over-year. In constant currencies, revenue was $23 million. We still reported a loss due to our investment in growing club members. The Q3 reported loss was $2.6 million compared to reported operating profit of $0.5 million in the prior year period. Slide 5 explains that we decided to accelerate the shift toward membership fee revenue by more quickly growing paid Club members. The reported quarter loss came from higher investment in growing the number of club members. Our objective is to increase recurring membership fees revenue. Please turn to Slide 6. Club members drive recurring revenue from membership fees. In Q3, we added the largest number of club members yet. The number of club members increased 65% year-over-year. Slide 7 explains as a reminder that with subscription businesses, membership fee revenue is recognized readily over the subscription period, whereas acquisition costs are expensed as marketing costs immediately. Slide 8 shows that marketing costs reduced reported quarterly EPS in the short term are projected to drive better results in 2027 and beyond when deferred revenues and recurring revenues increased profitability. While marketing costs are negatively impacting EPS this year, we still estimate a positive impact on 2027 EPS of $1.20. Please turn to Slide 9. Even though we invested even more than in Q2 and acquired more members, the average acquisition cost was lower, better in Q3. On the left side, you'll see that the average acquisition cost of a club member was $54 in Q3. The member pays in the U.S. case here, their $50 annual membership fee right at the beginning of the membership period. Additionally, we generated an average of $15 per member in revenue from transactions within 90 days. In addition, there will be revenue from transaction and advertising and future membership fees from recurring renewals in future period. We believe the total payback is attractive. Now please turn to Slide 10. I both in North America and Europe segments increased revenues. JAK Flight Club reported a decline due to a decrease in deferred revenue from less members acquired in Q1 and Q2. On Slide 11, you'll see the reported GAAP operating margins as a number of membership renewals, which do not have acquisition expenses grows, operating margins are expected to substantially improve. In the short term, fluctuations are likely. Slide 12 shows an investment of club members of Travelzoo occur in all key markets. On Slide 13, we provide information on non-GAAP operating profit and operating loss as we believe it better explains how we evaluate financial performance. In Q3 2026, non-GAAP operating loss was $2.1 million compared with non-GAAP operating profit of $1.1 million in the prior year period. Slide 14 provides information about the items that are excluded in the calculation of non-GAAP financial information. Please turn to Slide 15. As of September 30, 2026, our consolidated cash, cash equivalents and restricted cash was $8.8 million, an increase in $1.2 million compared with Q2. We we repurchased [ 256,898 ] shares of our common stock. Now looking ahead, for Q4 2026, we expect year-over-year revenue growth we also expect revenue growth in the subsequent quarters as membership fees revenue is recognized ratably over the subscription period of 12 months as we blow correct numbers and as more legacy members become club members. Over time, we expect profitability to increase as recurring membership fees revenue will be recognized. In the short term, fluctuations in reported net income are likely. Now I'll turn the discussion over to Holger.

Thank you, Jeff. We will continue to leverage Travelzoo's global reach, our trusted brand and the 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 enthusiasts to travel to places they never match it they could. Travelzoo is the must-have membership for those who love to travel as much as we do. Please turn to Slide 17. Membership empowers travelers to live the life of a travel enthusiast to the fullest while respecting different cultures. Membership provides access to high-quality and highly valuable club offers. Our global team negotiates and vet them rigorously. Club offers cannot be found anywhere else. Some examples, GBP 59 for Stage II at 115 English is a 60 nights for less four hours $60 per day, which includes your cabin food drinks, entertainment. Also exclusive offers like a cooking class with a Michelin star chef in Tasi or for those who want luxury and seclusion, an all-inclusive stay at a 5-star private island in the Maldives. Membership also provides complementary access to airport launches worldwide in case of flight delays. And in Q1 2026, we launched in partnership with Allianz, the first travel enthusiast hotline. It provides 24/7 complementary assistance wherever you travel. Culinary journeys curated for the travel enthusiasts are coming through. Slide 19 shows the worldwide complementary loss access in case of flight delays. It is perfect for the travel enthusiasts. Slide 20 provides information about sentiment and demographics of members travels with love by travel enthusiasts who are affluent, active and open to new experiences. 90% stated they are open to new destinations and travel ideas. Almost 90% are likely to book an unplanned trip with an attractive offer. 62% plan to take 2 or more international trips in 2027. Information about the median household income shows that they have the means to do so, especially given the outstanding value of our club offers. Travelzoo members also go on to resatravel longer than the general population if household spending had to be cut. Finally, on Slide 27, we provide an overview of our management focus. We are working to grow the number of paying DAP members and accelerate revenue growth by converting legacy members and adding new club members, retain and grow our profitable advertising business, accelerate revenue growth, which drives future profits in spite of temporary lower EPS, growth checks flight clubs, subscription revenue and launched Travelzoo Meta. Now Christina will provide an update on Travelzoo Meta and Czech Flight Club.

We expect the first travel Zimeta experiences to become available in Q4 of 2026. We Access to Travel Zimeta will be an exclusive benefit of Travelzoo Club membership. Project Flight Club to align with Travelzoo and other investment priorities, our focus is on revenue growth by growing members. Now handing over to the operator for questions for Jeff, Holger and me.

[Operator Instructions] Your first question is from the line of Patrick Sholl at Barrington Research.

I guess just this point, I hearing almost 2 years into having moved from the legacy mercering them to pay. I was just kind of curious if you could talk about anything you've seen in terms of like main drivers of user subscriber churn and kind of efforts around retention and what those have looked like as you've gotten more experience with the product.

What we are hearing from the club members is what's mostly driving their retention and renewal are the great offers, the exclusive offers that we provide them. I gave a few examples that's really what's most important to our members. These are offers that you do not find anywhere else. Some others also, of course, value the benefits we have added more benefits over time, just as I said, the travel enthusiast to line. These are also adding to continued interest in the membership. It allows us to growth number of members, as we said earlier, this quarter in Q3, we added the most club members ever. So we are confident in the future.

Okay. And then I think earlier in the call, you said that this was a record quarter for new member additions. As kind of looking at the cash flow statement, there was kind of like a deceleration in the increase in deferred revenue. I was just kind of curious if you could like reconcile some of that disparity, if that's just having of member additions and trial starts and just maybe just some of the factors that go into that. .

Exactly, the quick answer is that most new members join with a trial, which in the U.S. is $1 in UK it's GBP 1. Only when they then convert after 30 days to the full manship that's when we recognize the revenue and when it creates deferred revenue. So it's exactly what you explained.

Yes. No, I -- so would we be expecting like a significant acceleration in deferred revenue in Q4? Or is there just a difference between the conversion from that trial to a full year membership?

It's the 30-day delay, the more members we add, the higher and more fast deferred revenue will grow. It's exactly what you said. .

Your next question is from the line of Michael Kupinski from Noble Capital Markets. Please go ahead. .

You highlighted the decline in average U.S. acquisition cost to $54 from $62 in the second quarter. What drove that improvement? And how sustainable -- is it that you can continue to accelerate membership growth at that rate? And I guess, is there an opportunity to bring those acquisition costs back down towards the $27 level that you reported in the first quarter?

You are correct, Michael. We added more members at a lower acquisition cost. We're very happy about that trend. Christina, do you want to add what's driving that?

Sure. I think the main driving factors of the efficiencies that we found in Q3 is a combination of we had a lot of great offers that we use on various channels like book that drive a lot of interest in the membership. And so we were able to have large volumes of offers running, which allows us to scale our spend up. And then when we see that there's interest in those offers. It allows us to get the efficiencies down despite scaling up spend significantly.

Got you. It certainly worked for me. I'm going on a trip next week. The follow-up the club members increased an impressive 65% as you mentioned year-over-year. Can you provide more color on how much of that growth came from converting existing legacy members versus attracting entirely new members? And then your presentation projected membership revenue increasing from approximately $17 million to more than $30 million in 2027. And how much of that growth is already supported by existing paid memberships and deferred revenue versus assumptions for new membership acquisition and renewals.

Michael, the answer to your first question is it's typically about half-half in Q3, it was more new members, a little bit more than half. And to answer your second question, that number of $30 million is based on members we have already what we are expecting. How many of them we are expecting to renew and new members that we are signing up. As Patrick mentioned earlier, there is already substantial deferred revenue around $13 million. On the balance sheet, that will continue to increase. And then with all the new revenue and payments that are coming in, that's how we get to around $30 million. That's our expectation for next year.

Your next question comes from the line of Ed Babu from Ascendi Capital.