Description

Travelzoo (TZOO) is an online club for travel enthusiasts, featuring travel deals from airlines, hotels, cruiselines, vacations, and vouchers for offers from local businesses. TZOO has 223 employees, TZOO boasts 30 million members, 8 million mobile app users and 5 million social media followers, and publishes deals from over 5,000 travel, entertainment and local providers. In 2020, due to the pandemic, which decimated travel generally, TZOO’s revenues declined ~50% and the company lost $1/sh. The Company has come back most of the way since its previous 2019 high water mark, and in 2023 it earned $0.83/sh.

TZOO has a $120mm market capitalization, gross margins of 87% (cost of revenues is basically network expense), improving fundamentals, including revenue growth of 19.4% in 2023. TZOO is currently cheap with a trailing P/E of 10.7X, and an EV/EBITDA ratio of 6.6X. TZOO was last written up on VIC in early 2020 by zach721, so readers can review that writeup for additional details.

Industry

According to Statista, international tourism is only now, in 2024, expected to surpass pre-pandemic levels of 1.5 billion arrivals worldwide. The travel industry today is healthy, having effectively recovered from the pandemic. It’s been a roaring comeback. According to WTTC, the travel industry grew at 24.7% in 2021, at 22% in 2022, and at 23.3% in 2023, when it achieved a value of $9.5 trillion. We now expect recovery rates to slow as they converge to a lower secular rate. WTTC estimates the industry will grow at a CAGR in excess of 7% for the next decade.

Digital advertising, the primary means by which TZOO operates, is also healthy. Digital advertising is expected to account for 59%, or approximately $550 billion, of global advertising spending in 2024. Travel businesses face the challenge of reselling excess inventory (airline seats, hotel rooms, cruise cabins, etc.), and for these businesses digital advertising is a fast, flexible and cost-effective solution. No advertiser accounted for more than 10% of TZOO’s Total Revenues.

Revenue Categories

TZOO has three principal revenue categories: 1) TZOO North America, 2) TZOO Europe, and 3) Jack’s Flight Club (there is a fourth, “New Initiatives,” but its revenues are de minimis).

Let’s review the North America and Europe categories. First, a word on segmentation. Within each of TZOO’s North America and Europe categories, TZOO generates revenues from two segments: Travel and Local.

Travel versus Local Segments

The Travel segment represents ad fees from travel companies advertising on TZOO’s media properties, and commissions from Getaways vouchers, typically hotel bookings. For Getaways, TZOO recognizes a percentage of the face value of vouchers upon sale, net of an allowance for future refunds (more on some balance sheet effects of this later). The Local segment represents offers from local businesses, such as restaurants, hotels, spas and day experiences.

Let’s address the bad news first. The Local business seems to be shrinking. Revenues are down from $5.4 million in 2021 to $4.2 million in 2023. It’s especially bad in North America, where Local Revenues declined by 17.6% in 2023.

The good news is that Travel is booming, and that segment is 90% of TZOO’s Revenue.

Even after accounting for shrinking Local business, in 2022, North America Revenue grew at 13.3%, and in 2023 that growth accelerated to 17.7%. North America now represents 67% of TZOO’s Total Revenues. This is the bread and butter of the business, and this category appears to be quite healthy.

A similar story unfolded in Europe, where Revenues grew at 12.3% in 2022, and at a blistering 23.5% in 2023. Europe now represents 29% of TZOO’s Total Revenues (again net of the shrinking Local business). This category also looks healthy.

TZOO acquired Jack’s Flight Club in 2020, and since then it has grown at a CAGR of 5.7%, and today it represents 5% of Total Revenues. Jack’s Flight Club revenues are generated from paid subscriptions, with an email newsletter and mobile app focused on alerting subscribers to cheap flights. The first rule of Flight Club is don’t talk about Flight Club, so in our view the jury is still out as to how successful this effort will be.

The company also announced the launch of Travelzoo META, which allows virtual travelers to explore hard-to-reach corners of the world, including Mount Everest, or travel back in time in the Metaverse. The company entered the market through an acquisition, for which it offered cash, a note and some shares to the acquiree. Sadly, these shares were priced at $4.45 at the closing, so it was expensive dilution. Nevertheless, McKinsey has estimated the Metaverse will be a $5 trillion market by 2030, and McKinsey is bullish on travel. The company says it will pursue META diligently and with discipline. Again, the jury is out, so we shall see.

Overall, however, we think TZOO’s Revenue growth looks strong, since Travel has been doing so well. When Travel, representing 90% of your Revenues, grows at 21.4%, it’s hard to screw up too badly, even if other, smaller areas of the business struggle, as the Local segment has. The company expects growth to moderate somewhat in Q1 2024, and for the remainder of the year, due to advertisers’ becoming cautious because of wars in Ukraine and Israel. Additionally, the company announced in January the service will no longer be free, and members will be charged a $40 fee (the fee is waived in 2024 for existing members). Thus far, new sign-ups are modestly ahead of what the company anticipated, and TZOO is cautiously optimistic. It remains to be seen how consumers will react to the paid subscription model. The company has stated this gives them more leverage in negotiations with prospective travel partnerships.

Balance Sheet

As an online business, TZOO is asset-light, so operations don’t tie up a lot of capital, and require little reinvestment in the business. The company has no long-term debt, but it has some capitalized operating leases, and $15 million of cash, resulting in a modest negative net debt position.

It's worth noting that free cash flow has taken a hit recently due to working capital issues, notably $12 million in merchant payables (owed to partners for future voucher payments) that the company paid down in 2023. The company has stated it expects merchant payables to stabilize at current levels. The company in its current state maintains a modest working capital account deficit. Despite these sizeable paydowns of short term liabilities, the company still generated in excess of $10 million of free cash flow last year. So if it’s true that merchant payables stabilize here, other things being equal, you might expect to see normalized FCF at, say, $22 million, which would represent a 19% FCF/EV yield. That means a higher likelihood of cash being freed up for shareholders in the future.

And the company is generally shareholder friendly. While there’s no dividend, the company repurchased $16.7 million in stock during 2023, including 600k shares in Q4 of 2023, and it has stated it intends to complete its share repurchase program, which as of October 2023 was authorized at 1 million shares.

Summary

The big muscle movements of this business are not hard to understand, and the company is executing. TZOO is focused on its core mission of continuing to grow the number of TZOO members, leveraging existing relationships with travel suppliers, and adding new relationships. TZOO grew its consolidated social media following by 9.1% during 2023.

Q1 earnings will be announced on Wednesday, April 24. We think Q1 EPS will be in the $0.25-$0.30/sh range, and that TZOO has good chance to earn $1.00/sh for 2024 (versus $0.83/sh for 2023), and perhaps $1.10-$1.20 for 2025. We believe earnings are compounding at a rate higher than 10%.

That’s pretty good growth, and at a P/E of 10.8X and an EV/EBITDA ratio of 6.6X, we think the company is conservatively valued.

Catalyst

-Continued pandemic rebound, secular growth in travel

-Share repurchases

-Stabilize Local segment

-Call option on growth of Jack’s Flight Club, and META