Ave Maria Focused Fund's Chadd Garcia talks eDreams $EDR.MC (podcast #192)

Chadd Garcia, Portfolio Manager and Senior Research Analyst at Schwartz Investment Counsel Inc. - Ave Maria Focused Fund, joins the podcast for his second appearance to share his thesis on eDreams ODIEGO (MSE - Madrid Stock Exchange: EDR). You can find his first podcast appearance on DBRG here.

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Transcript begins below

Andrew Walker: All right, hello, and welcome to Yet Another Value Podcast. I'm your host, Andrew Walker. If you like this podcast, it'll mean a lot, if you could rate, subscribe, review, wherever you're watching or listening to it. With me today, I'm happy to have, for the second time, my friend, Chadd Garcia. Chadd is the portfolio manager at the - I'm doing this from memory - it's the Ave Maria Focus Fund, right?

Chadd Garcia: Ave Maria Focused Fund.

Andrew: There we go.

Chadd: Ticker A-V-E-A-X.

Andrew: Say it again, just so people can hear it.

Chadd: Ticker A-V-E-A-X.

Andrew: Chadd, they have won the Category King award four times this year. We were talking four, and you said, "Well, if they are awarding every month it would actually be more", but congrats on a good year so far. I won't dive too much more into it for compliance reasons. But speaking of compliance, let's start with the disclosure. Nothing on this podcast is investing advice; that's always true. Today we're going to be talking about an international stock and international stocks carry extra risks, extra consideration. So, everybody should keep that in mind as we talk through the stock. But Chadd, I'll turn it over to you in one second. I just want to say, I've looked at this company a few times before, but I really dove into it yesterday. You and I have some mutual contacts in common who will probably test you. I was just calling everyone like, I'm so interested in this. I need to talk. I need to understand this sport. So, I'm really interested in this idea. That's going to come off to the podcast, but let's dive into it. The company is eDreams and all turn it over to you.

Chadd: Sure. Yeah, eDreams ODIGEO, I started looking at this in 2019, and I had the same feeling that you have now, when I looked at it. Like, what is this small European online travel agency that I never heard of that has an American CEO and seems to be doing everything right? The company was formed in the 1990s. Like several other online travel agencies, it was put together through a combination of several acquisitions. It went public in 2014. It stumbled a little bit when Google adjusted their algorithms on their search engine optimization. Then that caused the change in management where Dana Dunne, an American, took over. Since then it seems like they sidelined Google as it eliminated the kind of the Google problem that's played by other online travel agencies, particularly Expedia.

They launched a subscription program that they called Prime, after Amazon's Prime. It's more in my mind though, akin to Costco's program, but Cusco doesn't have a sexy name for their subscription program. They just called the Costco membership, but since then the business has done well. I invested in it; in 2019 COVID hit. It was a painful time to own it through COVID, but the Ave Maria Focused Fund, we launched in May of 2020, so right after COVID hit.

Andrew: That's a nice time to launch a fund.

Chadd: No, no, no, March would have been a nice [inaudible] lots of funds. In May, the roof looked like was falling apart and everything was priced up because of the fed liquidity. So, it's a little more challenging than you might think, but that said, the company which has its fiscal year end, and on March 31st printed their Q4 in late May, early June of 2020. They had some months of COVID's impact in it. You could see that the company would have several years ahead of them even with significantly curtailed travel. At that point, I invested in the Ave Maria Focused Fun, and kind of shortly after the Q4 print. That's been a good decision for us.

Andrew: Okay. So, let's fast forward a little about to today, right? The key thing with - and I would encourage anyone to go read their investor deck because I think it lays out a lot of this - nicely, you mentioned the Costco membership. They start talking about Prime Costco, but I guess the key thing at this point is they kind of got proof of concept with Prime, right? There are up to 4.7 million Prime members. It sounds silly calling it Prime. I just think Amazon when I say it, but they're up to 4.7 million Prime members. They're talking about, "Hey, the Prime got all the things, subscription-based, better margins, all this type of stuff." So, why don't you just quickly cover what the Prime offering is? What does it gets you when you sign up for it? Then most of my questions actually relate to Prime because that's really the key question point on the story currently.

Chadd: So, let's back up real quick, eDreams is a global online travel agency, but about 80% of their business is in Europe. They're focused on leisure travel, so they're not really exposed to business travel or traveling consultants. They're exposed to leisure, which rebounded a bunch quicker after COVID than travel in general. What they've done is they built a prime program. You spend € 55 on it a year, if you're European, and it gives you discounts on travel. So, if you look at the legacy of eDreams, they started out focusing on flights. So, for an American, I think it's a little hard to, at first, can't get your arms around it because online travel agencies for flights in the U.S. is a horrible business. The reason why it's a horrible business is that you've got the top four airlines in the U.S. control about 75% of the routes. They have fantastic apps that you can use that you can book your tickets on. You can make changes, etcetera.

In Europe, the top four airlines control 29% of the routes. So, you have much more fragmentation; 80% of the flights in Europe are multinational flights. They're often multi-legged and their customer service isn't as great as it is in the U.S. even though people complain about U.S. customer service. It's very rare in Europe to find a 24/7 customer service phone number. Their apps aren't up to the level of the U.S. apps. There are over 690 airlines that operate within Europe. So, it's highly fragmented. The airlines pay online travel agencies a fee for booking customers via their airlines, and online travel agencies often charge their customers a booking fee. So, there's two revenue streams traditionally for an online travel agency in Europe. eDreams charges their Prime members €55 membership fee.

Then for that, they give back both the airline fee and the customer direct booking fee. So, the customers can generate substantial savings from it, and eDreams is only looking to make the € 55 off of their customer. So, if they just booked a flight that pays back typically within two buttons, and by the way, eDreams also extends the Prime pricing for anybody who you book that's traveling with you. So, if you book a family of four, it essentially pays for itself on the first booking.

Andrew: When you say pay for itself, just to clarify for listeners, the Prime membership pays for itself, right? I subscribed for € 55 or € 80 per year prime deal. I got € 50 off my first flight. My second flight, I got € 50 euros. Boom, I've saved € 100 I paid for the Prime deal.

Chadd: There shouldn't be too many opportunities for an airline to be able to be priced cheaper than the online travel agency in Europe because of the fragmentation for a couple reasons. One, is that there is a history of booking with online travel agencies and the airlines pay for that, pay them to do that, number one. But even more importantly, because of the fragmentation, there are more opportunities to do what in the U.S. that we call “a hacker ticket”. So, you fly outbound on one airline and fly inbound on a different airline. You put the two tickets together and they're much cheaper, particularly if you have an app such as eDreams app, which will help you manage your flights.

Andrew: Perfect.

Chadd: So, eDreams Online Travel agency should be the lowest priced way to book in Europe. Then if you're a Prime program member, you even get a lower price.

Andrew: Perfect. So, I'm going to dive into the Prime, we'll dive into the Prime membership in a second, but let's just start with the overall vision because I think that's what's really exciting. I think the Q1 results were really good. The Q4 results are really good. You're starting to see the proof in the pudding. They're kind of starting to hit the flywheel. It's the hope, right?
But let's just start the overall vision. They've laid out, I believe, it's 2025 targets and can you just talk to me about what those 2025 targets are, and what they would kind of imply for the stock, so people can get an idea of why it's exciting? Why the bookcase? Why was I so excited yesterday? What is the bookcase?

Chadd: Well, they laid up the vision in November of 2021, and it was to have 180 million plus of EBITA and 7.25 million Prime members. Coming out of COVID when the lockdowns were released in June of '21, they had about a million Prime members. Today, they have probably 5 million Prime members. They've grown 4 million Prime members in two and a quarter years. They're still growing about 375,000 Prime members every quarter, which is on pace to hit the 7.25 million Prime members by the end of fiscal year '25, which is March of '24.

Andrew: Can you talk to me, so [crosstalk]

Chadd: Excuse me, March of '25. [crosstalk]

Andrew: Off hits the 7.25 members, the 180 cash EBITA, and again, this would be most of the cash EBITA Prime is a subscription membership. We'll talk more about the Prime in the implications, but subscription, 180 million subscriptions probably going to carry a higher multiple than 180 million in EBITA from one time booking fees and stuff. But 100 million cash, 180 million cash EBITA, if they hit that, can you kind of put that into perspective versus the current stock price?

Chadd: Well, last year they delivered 84 million of EBITA. They'll probably hit 125 to 130 million of EBITA this year. If they hit the subsequent year 180 plus, then you're looking at EBITA growth of north of 40%. So, if you have a revenue and earnings stream that's predominantly driven by subscription, which makes it very stable, what would you value such an earning stream at, if that earning stream is going at 40% plus? I would say it'd be in the low single digit free cash flow yields. So, if you're looking at 1 1/2 to 3 1/2% free cash flow yield, that probably gets you to € 20 to € 30 stock price. I think that's worth that today, 20 to € 30 in trade at 650.

Andrew: Just supported for people 1 1/2 to 3 1/2 % cash yield, if I'm doing the math in my head right, that's about a 33 to approaching 50 times free cash flow multiple, if you want to use a multiple set of cash flow yield. So, as you said, it's trading between 6 and € 7, you think it's worth about € 20 today, and it could be greater as Prime kind of continues to grow? I mean, there's great stats in here. Hey, they've only launched Prime. I think it's in 4 of the 11 countries that they cover, and obviously they've got more. They've got flights over 44, I think. I might kind of think about that math in my head correctly.

Chadd: They've launched Prime in more countries, but it's not... I mean they have Prime going in the U.S. right now, but it's not fully functional Prime. So, fully functional Prime is just kind of the core European markets at this point. So, if you want to talk about the growth beyond physically, you're 25 and one is just deeper penetration in the current European markets with Prime. Right now, in their core markets, Prime is about 3% penetrated in their core markets for travelers who would use online travel agencies. In their highest penetrated market which is France, it's 4 1/2% penetration rate. This product saves customers money, and so that's a pretty good value proposition if you're a traveler in Europe, to use. So, I would imagine that they're going to have much more success growing the Prime offering within Europe just on flights.

Now, they will sell you hotels and they have sold hotels for several years. They haven't really made a large push into it, and that's what's really exciting to drive growth beyond their fiscal year, 25 targets. So, the reason why it's taking a little bit of time is that their website was predominantly kind of flight-focused. It's not to a level yet that they really want to do a hard push into the hotels. I mean, they'll sell you one and I did some traveling this summer and I've used it. I thought it was fantastic and I thought their offering was good. But they want to be able to, if you want to search for a hotel, let's say you're traveling to Paris, and you like Sofitel Grand hotels, right now you can put in there, and you have a map to show you all the hotel offerings that they have in Paris. But they won't be able to sit down further. So, show me all the Sofitel Hotels in Paris and put it up on a map for me. Functionalities like that.

Furthermore, the discount that you get for being a Prime member on hotels right now, you have to kind of put a code in. So, you get it at the end. You don't really see it up front on the search screen. So, they want to kind of figure a way around that. So, customers really give eDreams the credit for delivering the savings that it does. But this is coming, I would suspect, by the end of this calendar year, or early next calendar year. I think that the Prime program will give them a structural superior product in which to go after booking.com, which right now has basically a monopoly in hotel bookings in Europe.

Andrew: So, I think you frame the bookcase great, and as you said, just getting these hotels, expansion, like they've got the 2025 targets, which the stock could be a multi bagger on the 2025 targets. But what's so exciting is, if they hit those 2025 targets, it's kind of just the beginning, right? They'll just be ramping up on the hotels, more markets, everything. So, you've got tons of upside here. Let me [crosstalk]

Chadd: They're coming into the U.S.. They've hired an airline relationship manager in the U.S. last winter, spring time. You will see that happening, but you're not going to see that until after they launched hotels. That's the big market they need to go after next.

Andrew: My computer's running a little slow. So, I hope it's not affecting the video, but now [inaudible] Let me turn to the question, right? This was asked a little bit on the Q1 call, but the big question in my mind, there are two kinds of branching questions here, and it's, "Hey, these guys are launching a membership model. There’s a lot of travel, but the OTA travel business out there, to my knowledge, except for one, none of them have tried a membership model like this, right? The one exception is TripAdvisor, which we'll talk about sep... Let's start with TripAdvisor actually because that is like, people have listened to this podcast. People who've been in the value investing community will know, TripAdvisor tried to do something like this.

Some of the stuff you were saying sounds very reminiscent of TripAdvisor, right? Like, with the hotels, TripAdvisor said, "Hey, join us for $50 a year. We'll give you a discount on the hotel." But there was, I think, price parity deals with hotels. They couldn't show you the discount upfront. You had to be a member, and get all the way to the end for them to show you the discount because of price parity deals. TripAdvisor thought it sucked a lot of investors, myself included, where they had this huge funnel. They argued. We create all this value. They had this huge funnel to differentiate thing. They tried to launch the membership model, and for a bunch of different reasons, just failed. So, I guess the first thing in my mind is, "Hey, Chadd, why isn't this TripAdvisor all over again?"

Chadd: Well, I would say that if you have a moat, the evidence of that is the corpses of your competitors. This is one of them. Starting a subscription program in travel is not easy. eDreams have done it, but it took them a long time to do it. It's still in the early days, but they already have success. Probably took them beginning in flights in order for them to do it. In Europe, it's legal for a travel agency to price a flight cheaper than that of an airline. When you have the two levels of booking fees, traditionally that you can give back, the economics there are easy to see for a traveler. Like, okay, I would pay € 500 for a flight, but if I'm a Prime member, maybe I paid 450 because they're not making the booking fees. That's pretty easy to see.

Then, if you look at booking or TripAdvisor, they can't sell a Marriott hotel room cheaper than Marriott because of the agreements with hoteliers, the price parity agreement. But if you book through eDreams and you book a flight, and then you tag a hotel room onto your trip, you've kind of created a dynamic package or a kind of a walled garden. Within that wall, eDreams is free to give a discount back to their customers. Like from the hoteliers perspective, who knows where that came from? Did it come from the flights? Did it come from hotels? Where did it come from? So, in a closed environment, you're free to do more of that which booking can't do right now, unless they really push into dynamic packages. TripAdvisor couldn't do that when you're trying to launch a program.

Andrew: So, a lot of it in your mind is just because this actually goes nicely into the booking because the second question is, "Hey, booking Expedia, I think there's a Despegar, the LATAM, and a few others. Like almost all the other OTAs have some type of loyalty or rewards program. They all kind of look alike. Like they're all, to my knowledge at least, not that great. You kind of get like 1% of your cash, but you kind of get credits. Like, I booked all of my stuff through Expedia which is probably a mistake on my end. After all the trouble I've done over the past five years, I think I've got like 60 bucks in credits from them or something. But all of them have a similar structure. Like, why was eDreams the right one to crack getting a membership model? Because I would have thought, Booking, right? Booking is the world's largest travel company. Yes, they've got some trouble with Marriott Hotels and stuff, but in Europe, it's a lot of independent hotels. Hotels have a much higher margin than flights. I would have thought they were the best position to kind of launch a membership model.

Chadd: Well, they have the price parity agreements with the hoteliers to deal with. So, they can't price cheaper than the hoteliers, and then they're also competing with hoteliers for their own loyalty programs. I mean, I've used Expedia and basically, you get 10% of your every 10 nights you stay, you get the average of the 10 previous nights back to spend on their site. That's how their program works. But over time, I just gravitate - a lot of my travel being in the U.S. I just gravitate towards Marriott. We're going to Marriott and got a credit card and that works much better for me. So, I think why did eDreams get it right? I think they got it right because first, they were in flights, and flights you could price cheaper than airlines. So, it made sense for them to do that and kind of launched the prime program off of airlines.

Now, that will have benefits into hotels because again, it will create this kind of walled garden where they can give the discount backs for both booking fees, the hotel booking fee as well as the airline booking fee, and then in the eyes of the hoteliers, then it won't really matter to them because it's not going to appear like they are undercutting Marriott from a price parity perspective.

Andrew: Let me ask another question. So, the two that you've compared to, and you mentioned this at the start, eDreams compares themselves to these two membership companies at the start of their deck. They might have stolen it from you. I don't know, but the first one is Costco, and the second one is Netflix, and Netflix, looks like you're just trying to show, "Hey, we've actually added members faster than Netflix." I don't think there's a lot of comparison between Netflix and eDreams, but the Costco model is interesting. Here's why I'm asking. Costco, their model is, we make groups... All right, we had some slight technical issues that I think our editors were going to get through, but Chadd, I was asking you. So, they've got the Netflix and Costco comparison, right?

Chadd: Right.

Andrew: I guess, I'll just want to dive really into the Costco comparison. Here with eDreams, what their argument would be is, "Hey, we get the Prime membership, we're going to give you the flights at cost pretty much. Like Costco's giving you close to at cost, and then we'll make all our money from the Prime membership. I guess my question there is, what's the marginal cost of them giving a flight? Because it does strike me, I think they get like 3 to 5% commission for selling a flight that actually might be a little high. If they're kind of giving that all back to you, what's the marginal cost? Could they start losing money on Prime members who are traveling once a month or something?

Chadd: Well, I mean from the framing of that question, I mean, so you're saying that if they do 12 bookings a year?

Andrew: Yeah, I guess what I'm just wondering is if I'm Expedia, or someone else, a competitor, and I have got this person who's booking a flight a month with me, and I'm getting a 3% commission. That's going to add up to, I don't know, $360 in gross profit over the year. I guess what eDreams are saying is, "Hey, you just pay us $80 per year membership, and we'll give you that gross margin back." Right? Which is a great deal, win-win all around. I'm just wondering, is there a marginal cost here that's really eating into it where the more someone does, you could get really underwater on a Prime membership?

Chadd: No, I don't think so. Well, number one, they've got the IT, AI-driven IT, actually.

Andrew: There you go, an IA point. Let's go.

Chadd: That would allow them to kind of pull leavers to kind of prevent that from happening. But I don't think that the overhead cost of the business is going to be going up because some of the books are 12 times a year as opposed to two times a year. It's all IT backend overhead that they're going to be utilizing. It's the marginal cost, the variable cost component that they're kind of taking down to near zero.

Andrew: Yeah. Now that I think about it, that's silly. Let me go to a different one, right? I think they've only disclosed churn once, and somebody asked them about churn on their last call, and they said, "We don't disclose it. We only disclose it once you guys can see how it's going." But I think the said churn is going well. My worry is, TripAdvisor had this, right? You would get to the end, and they say, "Hey, your hotel is going to cost you $500, but sign up for TripAdvisor plus for $50 per year, and we'll save you $50 on this hotel, or maybe even $75. So, why not sign-up?

If you would sign up, and then guess what they would do? They would cancel before they got hit with the second charge. I do wonder, I think people probably fly, especially in Europe, fly a little bit more, but could you have a churn issue where, yeah, you've got tons of people signing up because it saves them money on the first trip. But then, you're kind of having an exploding problem where everybody's canceling after a year, and they've kind of already got the savings.

Chadd: I mean, you would see this, well, this is going to save people money on multiple trips, and Europeans like to travel, and they take more than one trip a year. So, the incentive is to keep the Prime program, and it gets charged up front. So, it's not like they kind of give you the savings away on the first one and not be able to recover it because they charge it up front the churn, the true churn, I would suspect is high single digits low double digits for true churn. That means somebody who doesn't like the program affirmatively wants to quit. I would say that the churn looks to be much higher and maybe mid-20%.

I think if I remember back from the one time, they disclosed it. Because in Europe, it is illegal for a company to reach out to their client, if the client's credit card expired. So, if a credit card expires and says, "Hey", you usually get an email in the U.S., "Hey, your credit card expired. Please update it." You can't do that in Europe. So, those figures are in their churn numbers, but then when the client goes and books their next trip, they find out that their credit card expired, they updated it. They re-subscribed, and so in my mind, that's not true churn. It's just more delayed revenue.

Andrew: That is one of the silliest rules I've ever heard. It seems so consumer unfriendly. It's ridiculous. A lot of my questions have come...I'm a U.S. domestic- focused, right? A lot of my questions have come, and I think I've got a U.S. point of mind. I say this because you mentioned Europeans like to travel more. They're famous for their long summers, hopping through cities and stuff. Do you think a lot of investors who are U.S. focused are having trouble with eDreams because they see, "Hey, U.S., 80 to 85% of the flight market is dominated by Delta, Southwest, United American. Hotels; it's Marriott, Hilton, one other one. It's really dominated by the brands, whereas if you go to Europe, as you mentioned, flights are really fragmented. Hotels are crazy fragmented in Europe. Yes, they do have Marriott and stuff, but most people who go are going to stay at a local hotel. They've got tons of local boutique hotels and stuff just much more fragmented. Much more room for an OTA to kind of take share, and much more room for flights to compete with the OTAs by offering cheaper flights or offering bigger commissions to kind of put their flights at the front of the line. Do you think that U.S. framing is hurting investors from understanding what's Happening here?

Chadd: I think that could be a barrier to entry for some people. It took me several months to get around to looking at it when my friend who's a large investor told me about it. I kind of look at it from an American perspective and then after a few months of him bugging me, I finally looked at it and realized there was something there. But that said, if you look at the shareholder base, some of the most astute investors in the shareholder-based are American funds. So, there are Americans who definitely get it.

Andrew: Another question. A lot of people - and this kind of relates to the churn question I asked earlier - but a lot of people when I said, "Hey, Chadd's coming on eDreams, what do you think?" Both on the replies and in kind of DMS and stuff said, "Hey, it seems like they're always moving the ball on us, and not in terms of their long-term guidance, but the disclosures here are constantly evolving and changing." A lot of people think they're kind of trying to pull the wool over everyone's eyes by changing the disclosures constantly so that nobody can kind of track them. What do you say to that criticism, and how did you get comfortable with the changing disclosures and nature of what they're giving you?

Chadd: No, I don't think their disclosures have changed all too much. The one disclosure, the one major change that they had happened last quarter where they stopped disclosing bookings for Prime members. Because if you look at, I mean, this company is terribly covered by the sell side. One of the things that the sell side that does cover it is focused on is the booking numbers. The booking numbers aren't relevant to the economics of the company because over 50% of the revenue is now coming from Prime. Over 55% of the profit is now coming from Prime. As that continues to evolve, the economics are driven by Prime absolute membership members. The rate of Prime growth and Prime churn is not driven by bookings. So, they didn't make that one change, but it doesn't really bother me that much.

Andrew: Does same bookings matter just because it shows how frequently the Prime members are using this, and it's an indication of how much value the Prime members are getting? Like, if I showed bookings were going way down, either A; people are not traveling as much, which is bad for Prime, or B; people are booking off Prime using a different thing. They're traveling as much. I'm just losing share, which is a disaster because one of the things with the membership model is you want to basically take 100% of your customers' spend once you get the membership model and can offer them a bigger discount.

Chadd: Well, I would say that if there's any issues with the current Prime membership, you would see that in the margins, and the margins are going up. You would see that in the margins because they would have more churn. If they have more churn, and they have to spend more to keep them to acquire new Prime members, to keep the net primary membership growth up, you'd see that in the margin because I would assume in my modeling of it that they give back, they're to give to Google a good portion of the first year's Prime fee. So, they really start to make money on Prime members after year one. About 75% of
Prime members come to eDreams directly. So, they don't go to Google, or other meta search providers to get there. That's what drives the probability of the Prime program. Kind of affected that number, and [inaudible] members. So, if there's problems with it, you're going to see it in the margins, and right now, the margins are going up.

Andrew: As you said, that's another great thing about the Prime. Once you subscribe to something, and they say, "Hey, we're going to give you the cheapest things, cheaper than you can find anywhere else." Your customers, not only just don't have the incentives to go to Google too often, start booking. They just open your app and book directly through you, which saves you all the Google marketing and everything fee. So, it's great for your overall business.

Chadd: Well, Booking was at Goldman's Conference yesterday, presenting. eDreams was out there to meet investors. They're not presenting, but they've been invited to Goldman's Conference, which is going to be fantastic exposure for them. But setting that aside, Booking talked about 48% of their customers book on their app, and about 50% book directly with them as opposed to going through Google. If you look at eDreams, about 58% percent of their customers book on app, which leaves 62% desktop, either going directly to their website or through Google. They don't disclose that, but they do have a much higher, at least on the app side of things. People booking directly with them as opposed to going through Google than even 800-pound gorilla prices like this. I think that as they do a bigger push into hotels, they're already into ground transportation, their into rental cars. When they do a big push to hotels, they could ultimately be like the one-stop-shop for European travel.

Andrew: As they pushed hotels, obviously, they got much more. We talked earlier about how they were flights, which probably five or seven years ago were a much lower value business. Even today would be a much lower value business because it's more competitive, and you get lower fees versus hotels. If they were advantageous versus Booking because that enabled them, that gave them a better launching point for the membership model.

Chadd: Right.

Andrew: As their membership grows, and as they push more into hotels like eventually you have to see a competitive response from booking, I would imagine. So, how do you think this plays out as we start to see a competitive response? Like do you think Booking, if they once they see 7 million members here in 180 million EBITA, do you think we see a booking membership rollout? Do you see kind of a battle in the streets for members going that way?

Chadd: Well, Bookings in their arena, they're trying things. So, the question is [crosstalk]

Chadd: Bookings, the man in the arena. The eDreams is the man that getting a role in the arena.

Chadd: Yeah, and the question is that, will it be successful in launching a subscription program? Will they be successful in flights? How long will it take? Will they ultimately care? So, if you look at, I mean, just go back to Booking's talk yesterday at the Goldman Conference. They are trying what they call connected travel, which is dynamic packages. Having more than one product. They say that flights are important to them. So, the way that they are getting into flights, and flights aren't easy, by the way. So, think about this. You've got over 690 airlines in Europe, and each of them have their own IT systems. So, just to build the APIs to deal with 690 different company's IT systems is challenging. Then, once you build the APIs to talk to them, you've got different fair rules and fair policies that you have to be able to take from an airline and translate onto your website. So, it's not easy from an IT perspective to get the flights right.

Booking doesn't have that capability in house yet. What they have done is they went to the number three player in European flights, Etraveli. They've had an agreement with them that they've extended through 2028 to have Etraveli kind of white label a flight's product for Booking. Then they ultimately wanted to bring it in-house and they tried to buy them. Right now, it's held up by the European regulators. I don't think it's going to go through. So, if they are successful on flights, it's going to take a long time. If they are successful, they'll have an outside entity basically having them over a barrel of one on the program. Maybe they've had each other over the barrel, but [crosstalk]

Andrew: That's about mutually assured destruction in some way. Yeah.

Chadd: Yeah, but then you have another organization that's getting economics on you, right? Their whole business model right now is built on hotels where they basically have almost a monopoly. So, in addition to the challenges of building a flight program, they also have a challenge of building a subscription program, which takes some time. It's a different model than they've built their business on. So, I look at it and see a situation that's similar to HEICO, the aircraft parts manufacturer. There's a Harvard Business School professor, David Yoffie who had a book called Judo Strategy where he used the competitor's size against them, if you're a smaller player.

In the case of HEICO, they make replacement parts for commercial airlines and commercial aircraft. They price about a 30% discount to the original equipment manufacturers, and they capture about 30% of the market. The OEMs are not going to get into a price war with them because they'll just rather see 30% of the market as opposed to crushing the margins on the 70% of the market that they retain. So, it seems like this situation is very similar. I mean, eDreams don't have to kill Booking, but imagine how big they would be if they got 5% of their European hotel volume?

Andrew: On the hotels, two or three people when I was talking to them about eDreams said they were a little skeptical of the hotel initiative. They basically said, "Look, hotels in Europe..." Again, I'm American-focused - it's easy to think, "Oh, you're just going to deal with Marriott and Hilton, and you've covered 85% of the rooms you need. They said hotels in Europe, you really need to go door to door knocking at getting connected to individual hoteliers in sites, getting them on your website. It takes a lot of sales and marketing. They said, "Look, if you look at eDreams, most of their hotel API, not all, but most of their inventory seems to be coming from they're just buying the booking API. Do you think, is that right, or do you think it doesn't matter because maybe that's the case right now? But in five years, they'll have more members and they keep building this out, building this out. Eventually, they'll get the inventory on their own.

Chadd: Well, let me ask you, if you're a hotelier in Europe, what do you think of Booking?

Chadd: It's the same, if you have an online business. You probably like a competitor to Google just to bring the margins down, and have different places to point people.

Chadd: Well, I think there's your marketing right there, your sales and marketing right there for eDreams. Then furthermore, I would imagine that the eDreams Prime member is probably a higher value customer for a hotelier than your average booking customer, which maybe a little bit more flighty and might cancel a little bit more often than somebody who's going to go out of their way and spend € 55 to be in a membership program in order to travel.

Andrew: Yeah, that might be true. It does strike me like hotels seem to me is the way you really unlock this Prime membership because again, I think you get roughly 3% fees on flights and you probably get 5 to 10% maybe more on hotels, if you're boosting someone to the top of the page, but also hotels are going to be a much larger purchase in general just because you booked three nights at 300 versus one trip at 300 or something. So, it does seem to me like as they unlock the hotel inventory, that's where the Prime membership really starts unlocking because that's where they have a lot more margin that they can give back to the consumer, or that they really can start proof pointing the value of this membership up. I mean, I'm not an expert. I might be imagining that, but that seems like a really interesting unlock. Again, they [inaudible] and they're still growing. [crosstalk]

Chadd: They built a 5-million-member program on the back of it.

Andrew: Exactly. One of the things that got me so interested is Q4 and Q1. A year ago, I would have been really skeptical, right? I would have said, "Chadd, we saw this with TripAdvisor. Nobody does that." Now, it's just, "Hey, the proof is in the pudding." Like, we're seeing the membership to salary; you're seeing it start to be profitable. Just used to me like, as I started, in 2025, we were doing an update, it seems like we'd really be focusing on, "Hey, the growth can accelerate because they've got so many members, and they're just starting to get the hotel inventory. That's where they really unlock the value." That's the kind of the most interesting piece of it to me.

Chadd: Look at it when they do come to the U.S. I mean having the flights and the hotels is going to be, in my mind, how they're going to get value for U.S. customers because now, as we discuss, the airlines are dominated by the top four. There's not really a place for the OTAs to extract much value there. You have the price parity agreements with the hoteliers, but if you can create a kind of a walled garden where you have flights plus the hotels, then who knows where the discount is coming from. Even the price parity going with the hoteliers in the U.S. and the airlines have exclusions for the dynamic packages.

Chadd: No. I definitely hear you though. I do think you mentioned Marriott Loyalty. I'm with you brother. I think I'm lifetime silver, but one more year, I might hit lifetime gold. I do think U.S. is just tough because 85% I think was a mistake to let their line marketed get to this concentration, but that's not here nor there; 85% concentrate on the airlines. The hotels are quite concentrated now as well. Like, you have a real reason, and these companies are constantly pushing you to book directly, get all the loyalty points and everything. I could see eDreams making money, ultimately talks, but it's tough because the largest customers like the most valuable customers are kind of already locked up in these loyalty programs. It's going to be tough.

But here's the nice thing. If I'm right and you're wrong in the U.S., guess what, they're still all the upside we talked about in Europe, and again, the proof is already in the pudding there. Let me talk about the longer term. Again, one of the nice things about a subscription business that's just on the inflection point, is its high margins. It's super visible, and as it, in flex, I think people can be kind of shocked by the margins on the upside, generates a ton of cash. What do you think capital location-wise, how does this play out?

Chadd: Well, if you go back, when I first invested in this pre-COVID, I think they were looking at a couple of acquisitions. I think those are off the table because I think their competitors were really hurt in COVID.

Andrew: What type of acquisitions do you think they were looking at? Just buying the number four player immersion with the number three players, something else? [crosstalk]

Chadd: Maybe some local markets in Europe. There's always like a brand maybe big in one country, and you can just tack it on to the eDreams backend, but I don't know. They haven't disclosed, but I knew that they did disclose that they were in talks with a couple companies. Then maybe the regulators stopped, and that was probably a good thing for them. They had also implemented a share buyback program. The company has a history for being extremely conservative. I mean, they've given guidance for
fiscal year '25, but that's the only guidance that they've given. Historically, they like to under promise and over deliver on the capital allocation that they should be buying back stock today. I mean they have cash on the balance sheet. They do have some data, but looking at where the stock price is at, and how stable these businesses are, and how easy it is to predict the growth rate of it, they should be buying back stock today.

I think that they want to get through calendar Q4, which is a heavy cash use period for them, from a working capital perspective. Then as that working capital unwinds in Q1 next year, they'll start to buy back stock. I mean, I hope they'll start doing it today. If they don't do it today, we're four months out. So, you're not going to see them doing any acquisitions in my opinion because they've proven out Prime and Prime is going so well. Their capitals are being spent on growth and that's pretty much spent on IT. You can see it in their capex numbers because they are allowed to write up, capitalize some of their IT spend. So, the rate of that is being driven by their ability to hire and train and get people working on new projects.

So, their capital is going to be going towards getting hotels to a point where they're ready to do a hard launch, and then after that geographic expansion. Then beyond that, the only thing that they have to do is pay down debt, but why would you do it at this point? We have to lock in some data at 5%, which is cheap. Then return capital to shareholders, and hopefully, they do that via share repurchases.

Andrew: Perfect. I'm just looking through my notes into the investor deck. I think we hit everything that I wanted to hit at actually. So, I just want to ask you, we talked a lot. There's a lot to talk about. Again, this is fascinating. I'm going to be researching a lot over the next few weeks. I can see why you and a bunch of smart friends are in it, but there is a lot to think about here. Is there anything else you want to leave listeners kind of thinking about or that they should be exploring, and if they could continue to kind of look at eDreams or dive deeper into it?

Chadd: Well, I would just say it's always, think about the risks. There are certainly some black swan events that could affect it. I mean, if Russia used nuclear weapons in Ukraine, I would certainly put a damper on travel for a bit, for a bit.

Andrew: Once the missiles start flying because, I guess if it was limited to Ukraine, that's fine, but once the missiles are flying, probably got bigger things to worry about than the nuclear apocalypse of my portfolio.

Chadd: But year-over-year in COVID, the revenue went down 80% and this company was able to survive mostly because they're cost structure at the time, 75% of it is variable, so a little higher than that now. So, I think they can survive a lot of head on. I mean right now, you have a slow down in Europe. You had massive inflation. You had COVID popping up here and there. They've grown the Prime program from 1 million members to 5. So, I feel pretty comfortable from a business durability perspective.

Like the one risk I have is that, or the one where I said that concerns me the most is that if the valuation gap between its current trading price and its intrinsic value, it doesn't close, the investors may push for a sale. If that happens, maybe they get taken out for 15 or € 20, which would be a good outcome relative to the 650 stock price today. But I think it would definitely leave way too much money on the table for the public market investors.

Andrew: I always laugh a little bit to myself when one of the risk factors is, "Hey, if this got taken out 150% from today's share price, I'd be furious." I'm kind of like, "You know what, I'd probably take anything up 150.

Chadd: What do you think the Prime program membership tops out at, though? I mean, it's not going to be seven. I don't think it's going to be 14, so.

Andrew: One last question on this. It is another interesting question I had. So, one of the things they said is, "Hey, in our biggest markets," which I think is France is their biggest market of Prime membership?

Chadd: Yeah, 4.6% penetrated.

Andrew: You mentioned that earlier 4.6% penetrated, which is, that's enormous, right? I remember before Netflix, every subscription service in the US would top out at around 30 million members, which is about 10% of the U.S. population. People can check me. I'm directionally right on that. That was before Netflix, but 10% is a lot; 4.6% for a travel program. There are people who don't like to travel. If I subscribe, my wife might not need to. My kids certainly don't need to. Your very retired, no-longer-travel parents don't need to. Like, 4.6% is a lot, and look, if they can do 5% of the entire European population like huge, but I wonder if it tops out in any country, you know?

Chadd: Yeah, it's not 4.6% of the French population. It's 4.6% of unique travelers or unique bookers.

Andrew: I feel really dumb saying that now because they would have way more Prime members. I feel really stupid, but part of what I just said held. So, we won't cut it out, and I'm fine being stupid. So, it's 4.6% of unique travelers in France?

Chadd: Right, unique bookers.

Andrew: Unique bookers on eDreams or unique bookers overall?

Chadd: I don't know. I have to go back and check that, but they've got it. When they are put together, I mean, you have to go back a couple of years. I think they dropped like what their [inaudible] is, and it was based on unique bookers.

Andrew: I'd have to imagine that it's more than 4.6% of their unique bookers just because so much of their revenue is coming from the Prime program now, but yeah. Anything else people should be thinking about?

Chadd: No, I think that's it.

Andrew: This was fantastic, man. Again, I was calling people all day yesterday trying to get smarter because I'm with you, there is the skeptic in me that says, "Hey, we've seen this with TripAdvisor. No one's done this before." But then there is, the proof is in the pudding, and it does seem like they're starting to hit the acceleration. As you said, if they're starting the acceleration, it's not stopping at 7.25 and 180 million cash EBITA. They're going to get hotels. No one's ever been able to crack, how do we get experiences itself into a membership? But if they can circuit and experience even if it's not fully into the membership, but you could imagine it could be absolutely enormous. Yeah, 2020 would not be the end of things.

Chadd: I did a little traveling this summer in Europe, and I booked my flights to and from Europe kind of directly with the airlines, and had some clients so that helped. But within Europe, on the hotels particularly, I think on my first leg of the trip in London, I used the Marriott hotel, but after that, I used eDreams, and it was fantastic. I was able to book it on the app and aside from that, I was able to book airport transfers transportation very easily on the app, which made it quite convenient. So, if you can throw excursions in there too, and book it in the app and have one place to go, and have one place to track your itinerary, I think that makes it super convenient. Going back to the benefits of Amazon and Prime makes everything convenient for the traveler. If eDreams can do that via their app, then [crosstalk]

Andrew: The one location is great, but the other great thing about experiences is, it is the most fragmented thing. If you hit somebody with an advertisement at the right time, they're very likely to book. So, the advertising rates and everything are off the charts, and you could imagine in Prime membership, they say, "Hey, you can book - I love escape rooms. I'm sure you know, I love escape rooms - you can book this escape room. It's $30 to book." They would pay us $10 in commission. We'll pass all of that $10 on to our Prime membership or maybe $8 of the $10 on to our Prime membership. So, you can book this escape cheaper than you can anywhere else because of that. You could see the huge win-win. Hit the customer at the right time. They're getting the experience they love, cheaper than they can get anywhere else. eDreams gets a little bit of margin there. For the escape room, they get a customer that they wouldn't have gotten a very competitive customer. So, again, if you start thinking about eDreams 3.0, 4.0, you can just really start seeing the unlock there.

Chadd: I would say, it's an interesting time. The stock is egregiously cheap. The shareholder base right now is, there's some high-quality shareholders in it. There's one large shareholder that needs to start to get out over time. So, as the price moves up, you may see some shares unlocked, which I think would be a good thing, and increase the liquidity in the stock. There at the Goldman Sachs Communacopia Conference today. They were invited there by the OTA analyst. Does that mean that Goldman may start covering them? I don't know, but it's a good sign. They should be buying back stock shortly. They should do a hard push into hotels. I think once the hotel's news comes out, then you'll probably see a new analyst stay. The last analyst stay they had was November of '21. So, there's a lot of good news coming up in the stock, I think.

Andrew: Yeah, and you can imagine analysts today where they push their targets further than 2025. As you said, they started giving more details on how they're cutting into hotels. How that's going to impact the business further? You can imagine all that. Cool. Well, anyway, Chadd, I've got to hop, but this has been fantastic, and just fantastic idea. I find it so interesting. Really appreciate you coming on for the second time. I know there's one we've talked about offline, and both have you on it for a third time, at some point in the near future to talk that one time.

Chadd: All right, I think I got a hat this time as a second time guest. So, I'll be looking for that in the mail.

Andrew: Don't spoil it for the other people, but you are right, second time guests get the exclusive hat.

Chadd: All right.

Andrew: Talk to you soon, Chadd.

Chadd: Have a good day.

[END]