Increasing revenue at high costs relies on membership to convert to spend

Update on Q3 Results

Travelzoo's cost to acquire a member increased to $40, making it a net 0 gain on membership spend alone. Direct member acquisition costs of $2.9m represents $2.9m of revenue with only $0-0.725m recognized this quarter (average $0.36m).

As $0.7375m of revenue from Q2 membership acquisitions should have already been recognized this quarter, TZOO has approximately $4.4m revenue still to be recognised over the next 3-4 quarters. Adjusting this quarters operating profit with this revenue in mind represents a net profit margin of 17% - a reduction from the previous quarters adjusted results.

The 10% revenue gain of ~$2m against Q3 24 can be explained by ~5% ($1m) membership revenue and ~5% other growth. Adjusting for the full membership revenue this quarter, revenue gain is ~25% compared to last quarter, however it should be noted that this revenue being at cost basis is not generating immediate value, and the 5% growth in other revenue (i.e. customer spend) is below what I would like to see.

I have adjusted revenue growth and profit margins down to be even more conservative, and still believe TravelZoo is undervalued, however the risks detailed below in last quarters analysis still apply and may be even more relevant now.

Q2 Analysis

Travelzoo's recent drop due to lower profit margins (based on higher customer acquisition costs) is fundamentally misunderstood.

Travelzoo acquires a new customer for $38, and that customer pays $40 for membership, leading to an immediate net gain of $2. The cost of acquisition is recognized immediately, whilst membership revenue is recognized gradually over the course of the membership. Travelzoo's acquisition costs this quarter of $2.8m represent $2.2-2.95m revenue still to be recognized. Adjusting for this quarters operating profit, this represents a gain of 8-25% profit on the previous Q2 2024 and approx 20% net profit margin.

The above calculation adjusts only for direct gains from cost to acquire new membership and does not include additional spend during the period (which Travelzoo estimates at an additional $18 per member and is already accounted for).

As Travelzoo continues to invest in acquiring new members, with favourable RoI, revenues will lag behind the true value but begin to snowball as each single quarters acquisition costs add to future quarters revenue. Travelzoo expects membership fees to account for 25% of revenues next year, which with a current revenue growth rate of 10% means membership revenue will be approx $20m (based on current revenues) but likely $25m-30m if the remainder of the business continues to bring the same non-membership revenues. I've conservatively valued growth at 15% p.a.

Challenges

• If Travelzoo cannot maintain its cost of acquisition as cash positive, the model relies more on customer spend to buoy the revenues. It is not clear if Travelzoo can continue to acquire at a cash positive rate, but they will continue to invest as long as it does so.
• If subscribers don't see enough value from maintaining the subscription then renewal rates will suffer, impacting future revenues and requiring Travelzoo to continuously invest to acquire members. Currently renewal rates are unknown as the program hasn't been in place long enough to observe.
• If the travel market declines, Travelzoo may see a downturn in membership and spend. Travelzoo believes it is somewhat insulated from this by its client base (affluent travelers, mostly 45+) and from its ability to obtain distressed offers to offer better deals, but it will likely still see some impact.