Hello, everyone. Welcome to the Travelzoo third quarter 2023 financial results conference call. All participants have been placed in a listen-only mode, and the floor will be open for questions following the presentation. Today's call is being recorded. 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 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. Now, it's my pleasure to turn the floor over to Travelzoo's Global CEO, Holger Bartel, Finance Director, Lijun Qi, and its General Manager, Travelzoo META, Arveena Ahluwalia. Lijun will start with an overview.
Thank you, operator, and a welcome to those of you joining us today. 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 number four. Travelzoo's revenue, operating profit, and the member count all increased year-over-year. Our consolidated Q3 revenue was $20.6 million, up 30% from $15.8 million in the previous year. In constant currencies, revenue was $20.2 million, which is an increase of 27% year-over-year. Operating income, which we as management call operating profit, increased 1,039% year-over-year. Q3 operating profit was $3.1 million, or 15% of revenue, up from $273,000 in the prior year.
As of September 30, 2023, we had 31.2 million unduplicated members, compared to 30.5 million as of September 30, 2022. Slide five shows that Travelzoo's year-over-year revenue growth accelerated further compared to the previous quarter, as well as last year. Year-over-year growth rates were higher this quarter in all business segments when compared to growth in the previous year. On slide six, we go into more detail about the revenue and the operating profit of our two largest business segments, North America and Europe. North America segment revenue increased $2.9 million, from $10.5 million to $13.4 million. The operating profit in North America was $3.0 million in Q3, compared to an operating profit of $1.0 million a year ago.
Europe segment revenue increased $1.5 million, from $4.5 million to $6.0 million. Europe had an operating profit of $267,000 in Q3, compared to an operating loss of $551,000 in the prior year. On slide seven, you can see that our GAAP operating margin was 15% in Q3, up from 2% in the same period last year. The operating margin of 15% in Q3 is much higher than before the pandemic. Before the pandemic, Travelzoo's reported operating margin was much lower because of losses from our Asia Pacific business segment. In March 2020, Travelzoo decided to make Asia Pacific a licensing business going forward. Now, operating profit shows the true profitability of Travelzoo in North America and Europe.
Slide eight shows that in North America, the GAAP operating margin remained high at 22%. On slide nine, we provide information on non-GAAP operating profit, as we believe it better explains how Travelzoo evaluates performance. Q3 2023 non-GAAP operating profit was $3.9 million, compared to a non-GAAP operating profit of $1.1 million in the prior year. Slide 10 provides more information about the items that are excluded in the calculation of non-GAAP operating profit. Please turn to slide 11. We maintained a solid cash position even after repurchasing 1 million Travelzoo shares during the quarter. As of September 30, 2023, consolidated cash, cash equivalents, and restricted cash was $16.6 million, a decrease of $4.0 million from September 30, 2022. Merchant payables decreased to $14.5 million from September 30, 2022.
Slides 12 and 13 details our revenues by business segment. The North America business segment saw a year-over-year revenue increase of $2.9 million. It was driven by revenue from travel. Revenues from local, consisting of local entertainment experiences, are still expected to recover from the pandemic. Turning to slide 13, the Europe business segment saw a year-over-year revenue increase of $1.5 million. It was driven by revenue from travel. Revenues from local are still expected to recover. Slide 14 shows how revenues compare to operating expenses. Most of the company's operating expenses, except for marketing, are fixed in the short term or midterm. We believe we can keep fixed low costs relatively low in the foreseeable future, while revenues are expected to grow. Higher revenues would just increase margins. For Q4 2023, we currently expect growth in revenue to continue year-over-year.
Now I turn over to Holger.
Thank you, Lijun. Year-over-year revenue growth accelerated from Q2 to Q3 again. We will continue to leverage Travelzoo's global reach, our trusted brand, and the strong relationships with top travel suppliers to negotiate more exclusive offers for our members. It is in times of large increases in travel prices that Travelzoo is most valuable for consumers. Travelzoo members enjoy high-quality travel experiences that represent outstanding values. With more than 30 million members, 8 million mobile app users, and 4 million social media followers, Travelzoo is loved by travel enthusiasts who are affluent, active, and open to new experiences. Slide 15 provides more information about Travelzoo members. You see that 87% say they are open to new destinations and travel ideas. Travelzoo members are true travel enthusiasts. Slide 17 provides an overview of what management and our global team are focused on.
We want to reach and surpass pre-pandemic number of members and accelerate revenue growth, add more innovative, exclusive benefits for travel enthusiasts to make the Travelzoo membership even more valuable, utilize the higher operating margins to significantly increase EPS, grow Jack's Flight Club's profitable subscription revenue, and develop Travelzoo META with discipline. At this point, I'd like to turn over to Arveena.
Hello, everyone. At this time, we do not have any significant updates for Travelzoo META. That said, we started accepting payments from founding members in Q3 2023. In addition, we are collaborating with best-in-class metaverse content creators on innovative browser-enabled metaverse experiences for founding members. Given the newness of this industry, we have been testing various content, member acquisition, and marketing strategies to determine the channels that yield optimal results. We continue to use data to make important decisions and be strategic with the deployment of our investment as we build the service. I look forward to providing additional updates in due time. I am handing over to the operator for questions for Holger, Lijun, and me.
Thank you. The floor is now open for questions. If you do have a question, please press star followed by one on your touchtone phone at this time. Once again, if you do have a question, ladies and gentlemen, that is star followed by one on your touchtone phones. Please hold while we poll for questions. Our first question comes from Michael Kupinski with Noble Capital Markets. Your line is open.
Thank you. I just have a couple of questions here. First of all, congratulations on your good quarter. The gross profit margins were better than expected in a seasonally slow quarter. I was just wondering if you had thoughts on the trajectory for gross margins going forward?
Hi, Michael. Yes, you are right. The gross margins fluctuate a little bit due to seasonality. I think in the next two quarters or next year, you will see similar gross margins as we have seen earlier this year.
Gotcha. And then you've shown an increase in the number of subscribers for Jack's Flight Club, and I know that this was an area that you thought had some significant growth potential. I know that the business started as flight deals, but have you-- and you indicated plans to kind of transition that to more of a travel model. Has that happened, and, and what are you doing to reflect that strong subscriber growth? Can you add some color on what you're doing in that segment?
Jack's Flight Club continues to focus on alerting its members and subscribers about great airfare offers, and that's what we continue to do. Now that recently flights and airline prices have gone up so much, there's interest, as we had expected after the pandemic is over. There's increased interest in people hearing about great flight deals, and that's probably. Not probably, but that's the main reason why the subscribers for Jack's Flight Club are up, and we are also happy that revenues are up, even more. So, finally, we are seeing stronger momentum with Jack's Flight Club, which was the main reason why we invested in this business.
Yes. You, at this point, you haven't introduced that to North America yet, because that was originally, the plan is to expand that.
But we have only to certain regions, not all of North America yet.
Gotcha. The ratio of your cash to merchant liabilities continued to improve in the latest quarter, and I know that you repurchased some stock, which affected the cash position. But when do you anticipate that cash will start to increase?
We expect cash to increase this quarter and, again next year.
Okay. Recently, the U.S. put a travel advisory for U.S. citizens traveling abroad. Have you seen any impact on this at this point?
No, we have not seen any impact on it.
Okay. That's all I have. Thank you.
You're welcome, Michael.
The next question is from Ed Woo with Ascendiant Capital Markets. Your line is open.
Yeah, thank you for taking my question. What are you seeing out there, you know, in terms of hearing from your travel suppliers, you know, the outlook for travel? You know, it seems like they held up pretty well during the summer, even with some of the macro issues. What are their outlook heading into the holidays in 2024?
Hi, Ed. People continue to be interested in traveling after pandemic, but that big surge of travel interest that we saw last year is dissipating a little bit. We are hearing, particularly from hotels and airlines in North America, that demand is slowing down and normalizing. It's also probably a result of the higher prices, because prices for hotels and flights has gone up tremendously over the last two years. And that's, of course, one of the reasons why our service, which helps people find great deals, is in great demand at this time, and we think that will continue. In Europe, we see generally, particularly in the U.K., we see consumers be a bit more cautious, also looking for more values. And so I would say the.
To get back to your question, the demand for the upcoming holiday season is still strong, but slower than what the travel suppliers have seen last year.
A follow-up question: Have you seen any noticeable trends in people downgrading hotels from five star to four star, or instead of taking, you know, a one-week vacation, taking five days, shortening their vacation, just to, you know, get the budget lower? Have you seen any noticeable trends in that?
We have not seen that, really, but what we have seen is a higher number of five-star hotels that are looking to work with us because they are not as busy as they were last year or in summer. That offers great opportunities for our members because we then negotiate with these hotels exclusive offers, and that allows our members to continue to enjoy, for example, five-star hotels at what they would normally pay when they went to a four-star hotel. But we have not seen any indication that there's less demand for upscale properties.
Great. Well, thank you for answering my questions, and I wish you guys good luck. Thank you.
Thanks, Ed.
The next question is from Steve Silver with Argus Research. Your line is open.
Thank you, operator, and let me offer my congratulations on the quarter as well. My first question, I guess, is related to the META. Arveena, you've mentioned that this quarter was a little light in terms of movement in the launch and tracking those types of metrics. Just want to get a sense as to whether we should be thinking about just looking for statistics on how the launch is going. Are you really thinking in terms of a quarter-over-quarter basis, or are we looking at maybe something a little geared towards next year, just in terms of the signal that you're looking for in order to invest in the business a little bit more aggressively?
Yeah. Hi, and thanks for the question. So yes, we are looking for more data and quarter-over-quarter data. At this point, like I mentioned earlier, what we've been working on is testing various strategies and seeing which strategies yields the most the most optimal results for us to see. But ideally, yes, we're tracking everything on a monthly and even quarterly data, but, you know, given the newness of this product and service, it will take some time till we acquire meaningful data.
Okay, great. And then one on the balance sheet. Just trying to get a sense as to, given the fact that there was a little bit of pay down over the last quarter on the merchant payables, just trying to get a sense as to whether those are a little bit more longer term in terms of coming due, or if you think that this. We're looking at maybe a 2024 more significant reduction in whatever payables will come due. Thanks.
Good observation, Steve. Merchant payables were indeed down less than what we had expected. The reason for that is that new voucher sales and purchases in Q3 were higher than we expected, so that led to new merchant payables. While the merchant payables from previously sold vouchers indeed went down as we had expected, but net-net, the decrease was not quite as high. As a result, that helped, of course, with higher revenues in Q3, because revenues came in better than what we had forecast. So that was quite good. And, as a reminder, most of the vouchers that are now purchased are non-refundable. Members can refund them in the first two weeks, but after two weeks, they become non-refundable. So the merchant payables today are a little bit different than what they were a year ago.
But we expect over the next few quarters, merchant payables to decrease further. And as I said earlier, we also expect cash to increase over the next few quarters. So that gap between the two should become zero or actually become positive, meaning more cash than merchant payables. That's what we really expect in the next couple of quarters to happen.
Great. That's very helpful. And, congratulations again.
The next question is from Jim Goss with Barrington Research. Your line is open.
Good morning. This is Pat on for Jim. I just had a question with regards to the size of the member base. You know, as you mentioned, the potential increase in interest in finding in deals just because of price pressure. I'm just wondering if that—if you guys. How, how you guys see the benefits of marketing activity to try to drive membership growth and sort of what, I guess, challenges you might be facing in terms of attracting members?
It is indeed both. On one hand, Pat, we are seeing more members coming to us because they are upset or not happy with the prices they are seeing for hotels and the airlines. And at the same time, we also increased our member acquisition during the third quarter. We were able to do that while still maintaining overall costs and expenses flat versus the previous quarter. So that was quite good, but we did invest more in member acquisition, and as a result, you see that member growth quarter-over-quarter and year-over-year was actually quite good this quarter, better than in previous periods.
Okay. And then with, you know, I guess, demand still relatively high, but maybe, you know, slackening, to what extent do you guys feel that you have the capacity within your existing sales force to continue to kinda evaluate or negotiate deals and kinda continue to. Or do, like, do you feel any need just to increase staffing to make sure that you're still presenting high-quality offers to your members?
Yes. As I've said, over the last two years, strong travel demands and hotels and flights that are full are not very good for us, but now things are slowing down, potentially economy is slowing down. That is good because now more of the travel suppliers come to us and work with us. They want, them, they want them to put offers to our members and get more guests into their hotel rooms or on their cruise ships. And, that doesn't mean we need more people, Pat, to negotiate these offers and research them. It just makes it easier. There's more competition among them. It's easier to negotiate a better offer. That translates then in better deals for our members, and of course, more interest than on the side of our members to take them, take advantage of these offers.
So the expense, as we said over the last couple of years, the expense we have for the team for selling, negotiating, producing, publishing, and so forth, is relatively flat, whether we have more or less members. So as the member base increases and revenues increase, that doesn't affect the expense side, but it makes it possible for us to increase margins or to invest more in member acquisition to increase the member base further.
Okay. And then I guess the last question I had, kinda similar to, to Mike's question. I was just wondering what sort of share of revenue do, like, travel deals from, to the Middle East generally contribute to quarterly revenue? And I realize it wouldn't be like, you know, completely, a complete absence of that revenue if it went away because there would be some offset. But just wondering what sort of impact, kinda the, the geopolitical tensions kinda could potentially have.
It is actually quite slim, because offers to the Middle East were, they don't represent a very large portion of the deals or the offers we make to our members. But apart from countries like Israel, of course, people may be more hesitant to travel to Egypt. I would say that, we may be seeing a very, very small impact in Europe, but in the, in North America, it's, it's, the impact is close to zero. Also, keep in mind what I said earlier, you know, 80, over 80% of our members are completely open to destinations. So, if they cannot go to a certain destination, then they just look to go somewhere else.
And that's the beauty about Travelzoo, that we are able to show our members and motivate them to go to destinations that they didn't think of. So if they can't travel to the Middle East, they will find some other place where they can go to and maybe some place they haven't thought about. And that's how it sort of compensates itself. And so in a nutshell, it really doesn't affect us yet in any meaningful way.
Okay. Thank you.
Okay. I'll turn it back now over to Mr. Holger Bartel.
Great. Thank you. And, dear investors, again, thanks for your time and support, and we look forward to speaking with you again next quarter. Have a great day.
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect your lines. Have a nice day.