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Travelzoo Inc. (NASDAQ:TZOO)

Q3 2008 Earnings Call

October 27, 2008 5:00 pm ET

Executives

Holger Bartel – Chief Executive Officer

Wayne Lee CPA – Chief Financial Officer

Shirley Tafoya – President North America

Chris Loughlin – Executive Vice President Europe

Jason Yap – Executive Vice President Japan, Australia and Singapore.

Analysts

Edward Woo – Wedbush Morgan Securities Inc.

Michael Millman – Soleil Securities

Operator

Good afternoon everyone and welcome to Travelzoo’s third quarter 2008 financial results conference call. (Operator instructions). It is now my pleasure to turn the floor over to your host, Holger Bartel, Travelzoo’s Chief Executive Officer. Sir, you may begin.

Holger Bartel

Thank you, operator. Good afternoon and thank you all for joining us today for Travelzoo’s third quarter 2008 financial results conference call. I am Holger Bartel, Chief Executive Officer.

And with me today are Wayne Lee, the company’s Chief Financial Officer, Shirley Tafoya, President North America, Chris Loughlin, Executive Vice President Europe and Jason Yap, Executive Vice President Japan, Australia and Singapore. Before we begin Wayne will walk you through today’s format.

Wayne Lee

First we will discuss the company’s third quarter 2008 financial results. Then we will provide additional information on the company’s growth in subscribers and growth strategy. We will then conclude with a question and answer session.

Before we discuss the company’s financial results, released earlier today, I would like to remind you that all statements made during this conference call that are not statements of historical fact, 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 our Forms 10-K and 10-Q and other periodic filings with the SEC.

An archive recording of this conference call will be available on the Travelzoo investor relations web site at www.travelzoo.com/ir, beginning approximately 90 minutes after the conclusion of this call.

I will now turn to Holger for an overview of the company’s Q3 2008 results.

Holger Bartel

Today Travelzoo announced its results for the third quarter of 2008. Diluted loss per share for Q3 2008 was $0.13 down from diluted earnings per share of $0.14 in the prior year period. Our financial results were impacted by non-tax deductible losses from our foreign operations in Asia Pacific and Europe resulting in income tax expenses of $1.4 million on a $374,000 pretax loss.

Our revenue decreased to $18.8 million in Q3 2008, a decrease of 6% over revenue of $19.9 million in the same period last year. Quarterly sequential revenue decreased 14% from Q2 2008 to Q3 2008.

The publications and products that contributed to our revenue are the Travelzoo websites in Australia, Canada, China, France, Germany, Hong Kong, Japan, Spain, Taiwan, the UK and the U.S. The Travelzoo Network in the U.S., the Top Twenty Newsletters in Australia, Canada, China, France, Germany, Hong Kong, Japan, Spain, the UK and the U.S. And the newsletter alert services in Canada, Germany, the UK and the U.S. And Super Search in Canada, the UK and the U.S.

Our publications and products provide latest and reliable information on the very best travel offers from hundreds of travel companies. Super Search is a travel search tool that leverages more than 2.8 million ratings from Travelzoo users, and makes it very easy for users to find the web sites from suppliers that offer the best prices and connections for specific dates. The Travelzoo Network is a network of third party websites that list travel deals published by Travelzoo.

I will now turn to Wayne to discuss additional information for the group and for our three business segments, North America, Asia Pacific and Europe. This will include headcount, expenses and operating results.

Wayne Lee

Thank you, Holger. Our North America business segment revenue in Q3 2008 was $16 million, a decrease of 13% year-over-year. Our Europe business segment revenue in Q3 2008 was $2.6 million an increase of 62% year-over-year. Our new Asia Pacific business segment generated $207,000 of revenue in Q3 2008.

In terms of revenue concentration, Travelzoo had one group of advertisers under common control that accounted for 13% of revenue in Q3 2008. No other group of advertisers accounted for 10% or more of revenue.

Travelzoo’s operating loss in Q3 2008 was $359,000 down from Q3 2007 operating income of $4.9 million. Operating margin in Q3 2008 was negative 1.9% down from 24.8% in Q3 2007.

Travelzoo’s net loss in Q3 2008 was $1.8 million, down from Q3 2007 net income of $2.2 million.

Reported net income was negatively impacted by an increase in our effective income tax rate. Although Travelzoo had a loss before income taxes of $374,000 in Q3 2008, we recorded income tax expense of $1.4 million.

The company recorded $1.8 million of income tax expense on the income from our operations in the U.S. and recorded a $421,000 reduction of income taxes related to the reversal of tax liabilities previously recorded for uncertain tax positions.

The $4.8 million operating losses in Q3 2008 from our Asia Pacific and Europe business segments and our operations in Canada, were treated as having no recognizable tax benefits. Cash used for operations in Q3 2008 was $3.4 million.

DSOs, that’s days sales outstanding, as of September 30th, 2008 was 52 days, up from 49 days as of June 30th, 2008. Total cash and cash equivalents as of September 30th, 2008 decreased to $15.8 million from $21 million as of June 30th ,2008.

In terms of headcount, Travelzoo had 207 employees as of September 30th, 2008. Up from 128 employees as of September 30th, 2007 and up from 191 employees as of June 30th, 2008. As of September 30th, 2008 104 of our employees were in North America, 51 employees were in Asia Pacific and 52 employees were in Europe.

Average annualized revenue per employee in Q3 2008 was $363,000, down from $623,000 in the same period last year. Let's now look at the expense line items of our three business segments.

In North America our largest expense item continues to be sales and marketing consisting primarily of advertising and promotional expenses, and salary expenses associated with sales and marketing staff. Total sales and marketing expense in Q3 2008 was 7.3% as a percentage of revenue decreased to 45.4% in Q3 2008 from 47.2% in Q3 2007. The decrease from Q3 2007 was primarily due to a $1.1 million decrease in spending on marketing for Super Search and a $286,000 decrease in spending on brand marketing campaigns. The decrease from Q2 2008 was primarily due to a $349,000 decrease in salary and employee related expenses.

In North America general and administrative expense was $3.8 million in Q3 2008, up from $2.3 million in Q3 2007 and down from $4 million in Q2 2008. The increase from Q3 2007 was primarily due to a $831,000 increase in salary and employee related expenses and a $603,000 increase in professional services expense.

North America operating profit for Q3 2008 was $4.2 million, down from $7.1 million for the same period last year. Operating margin for Q3 2008 was 26.4% compared to 38.5% for the same period last year.

For our Asia Pacific business segment, which consists of our operations in Australia, China, Hong King, Japan, and Taiwan, total sales and marketing expense in Q3 2008 was $1.3 million, down from $1.9 million in Q2 2008. The decrease in sales and marketing expense was due primarily to a $767,000 decrease in spending on subscriber acquisition campaigns.

Asia Pacific general and administrative expense in Q3 2008 was $1.2 million, down from $1.4 million in Q2 2008. The decrease in general and administrative expense was due primarily to a decrease in professional services expense.

Travelzoo began operations in Hong Kong in April 2007, in Japan in September 2007, in China in October 2007 and in Australia and Taiwan in December 2007. Our Asia Pacific business segment incurred an operating loss of $2.3 million in Q3 2008, compared to an operating loss of $3.2 million in Q2 of 2008 and an operating loss of $706,000 in Q3 2007.

In Europe our largest expense item continues to be sales and marketing consisting primarily of advertising and promotional expenses and salary expenses associated with sales and marketing staff.

Total sales and marketing expense in Q3 2008 was $3 million up from $2.1 million in Q3 2007 and flat compared to Q2 2008. The increase from Q3 2007 was primarily due to a $402,000 increase in salary expense, a $233,000 increase in Search advertising and a $165,000 increase in spending on subscriber acquisition campaigns.

In Europe total general and administrative expense in Q3 2008 was $1.7 million, up from $946,000 in Q3 2007 and up from $1.6 million in Q2 2008. The increase from Q3 2007 was primarily due to a $185,000 increase in bad debt expense, a $146,000 increase in salary expense, and a $109,000 increase in office expense.

Travelzoo began operations in Germany in September 2006, in France in March 2007, and in May 2008 began publishing our website and weekly Top Twenty list in Spain after having operated a sales office in Barcelona since November 2006.

Our Europe business segment incurred an operating loss of $2.2 million in Q3 2008 compared to an operating loss of $1.4 million in Q3 2007. Though revenues increased by $992,000 the operating loss increased as both sales and marketing and general and administrative expenses increased.

This concludes our discussion of Travelzoo’s Q3 2008 financial results. We will turn back now to Holger who will provide more information on the growth of our reach and our growth strategy.

Holger Bartel

Thank you, Wayne. During Q3 2008 Travelzoo added a total of 809,000 new subscribers to its email publications. In North America we acquired 361,000 subscribers, at an average cost of $3.73 per subscriber in Q3 2008 compared to 349,000 subscribers at an average cost of $3.39 in Q2 2008.

In North America Travelzoo’s Top Twenty Newsletter and Newsflash email alert service had a net unduplicated total of 11.1 million subscribers at the end of September 2008. This represents an increase of 2% versus the same time last year.

In Asia Pacific we acquired 194,000 subscribers at an average cost of $2.46 in Q3 2008, compared to 369,000 subscribers at an average cost of $3.37 per subscriber in Q2 2008. Travelzoo’s Top Twenty Newsletter and Newsflash email alert service had a net unduplicated total of 1.1 million subscribers as of September 30th, 2008.

In Europe we acquired 254,000 subscribers at an average cost of $4.52 per subscriber in Q3 2008 compared to 226,000 at an average cost of $4.89 in Q2 2008. In Europe Travelzoo’s Top Twenty Newsletter and Newsflash email alert service had a net unduplicated total of 2.1 million subscribers as of September 30th 2008, an increase of 69% versus the same time last year. The costs of our subscriber acquisition in North America, Asia Pacific and Europe are expensed as incurred.

In 2005 Travelzoo began its growth strategy of expanding into selected international markets. We believe that going global represents an attractive opportunity to increase shareholder value in the long term.

Markets in Asia Pacific and Europe are new revenue opportunities for Travelzoo. We see a competitive advantage from being able to cross sell advertising globally. For example our sales force in the U.S. now sells inclusions for our UK and the Canadian publications, while our sales forces in Europe and Asia Pacific also sell inclusions for our U.S. and Canadian publications.

Another competitive advantage is our improved ability to source the best travel deals and perform a very high quality review by leveraging the local expertise. Over the last two years we have filled a unique global network of producers and sales staff in eleven countries, Australia, Canada, China, Germany, Hong Kong, France, Japan, Spain, Taiwan, the UK and the U.S. Our plan is to aggressively leverage this global network to bring Travelzoo users the very best information available.

Our Q3 2008 North America operating results were impacted more negatively than expected by a weak economy. As a result we plan to cut costs in our North America business segments and intend to reduce the speed of our investments in Asia Pacific and Europe. Otherwise our strategy of developing Travelzoo into a global brand will remain unchanged.

In North America we plan to continue expanding the Travelzoo Network, a network of third party websites that list travel deals published by Travelzoo. Further we plan to expand our shows and events content. Finally, we plan to launch a metasearch product this year.

This concludes the discussion of financial results, the growth in subscribers and our growth strategy. Travelzoo’s consistent practice is not to provide guidance for future periods because of the dynamics of the industry. Therefore this will conclude our prepared discussion and I’ll turn over the call back to the operator for the question and answer session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ed Woo – Wedbush Morgan Securities Inc.

Ed Woo – Wedbush Morgan Securities Inc.

I had a question regarding just whether there was any patterns or trends in the quarter regarding advertising spending? And have you seen anything change from the end of the quarter to today?

Holger Bartel

I will actually turn this question to Shirley and then would like to ask Chris and Jason to comment as well as this might be answered differently by each business segments, so Shirley, if you could go ahead and comment on North America, and then Chris and Jason please feel free to add on about your regions.

Shirley Tafoya

Let me just make sure I have it correctly. So you’re looking at the difference in advertising spending for this quarter?

Ed Woo – Wedbush Morgan Securities Inc.

I guess actually I meant revenue for Travelzoo in terms of what – if there was any pattern as obviously the economy got a lot worse in September and it seemed to have got worse in October. I was wondering if there was any pattern to revenue during the quarter for Travelzoo? And whether it has changed at all in October?

Shirley Tafoya

You know the economy is definitely a challenging one at this point, for advertisers. But there’s, a couple of things that play. First of all airlines, there’s a few airlines that have gone out of business this year that we’ve been affected by and haven’t gotten repeat advertising from obviously, and vacation packagers seem to be squeezed a little bit more.

On the other hand our hotel business is doing really, really well. So while there’s downsides to the economy for us right now the upswing is definitely on the hotel side. And we’re seeing some really increased business there and the desire for users to want that information and so travel is still there as well. So it's advertisers coming to us with the right deal, which they've been doing very readily over the last six weeks or so and have really been pulling the results from it.

Chris Loughlin

This is Chris Loughlin in London, maybe I can answer for Europe. Interestingly September was the best month that we’ve ever had here in Europe. And we saw a pickup in advertising from asset holders in particular, so as Shirley already mentioned, hotels. But we’ve been relatively filled out, in our cruise inventory for some time in the UK now as well.

Where we are seeing a bit of a slowdown is on the, I guess the natural state of demand type products, so for example the Search product. The number of searches is down but the Push Media that you know which is our core product is definitely up in September.

Jason Yap

This is Jason from Hong Kong. Asia Pacific is in the mode of growing; our base is still very small. There is definitely no real impact to the revenue in the last quarter.

Ed Woo – Wedbush Morgan Securities Inc.

The other question I had is have you seen any change in the competitive landscape of other travel advertisers? Then the last thing I had was what about current state of adding subscribers whether Internet advertising is cheaper, more expensive or – in cost of subscriber acquisitions?

Holger Bartel

We have been facing in North America now, competitors for the last few years. They come; some of them go. It’s something that has become very normal for us. None of them, at least that’s what we are hearing from our advertisers, none of them is reaching the broad audience that we have filled up over the last few years in particular here in North America.

So as you have heard from Shirley, particularly the hotels in this bad economic environment, which are looking to increase occupancy rates, turn to us as a source that can really bring them a lot of business relatively quickly.

I wanted to add on to your question earlier about how the industry downturn is affecting us. As I’ve said in the past it’s a double, truly a double edged sword. On the one hand we see travel businesses that are affected by the slowdown. We see that they have a larger need to advertise deals. The deals we are promoting to our audience are getting better. Hotels are increasingly turning to us to help them fill their rooms. We will see that we are hoping to see this increasingly with other travel providers like packagers and cruise lines as well.

On the other hand on the Search side we have heard from other colleagues at other travel companies, online travel companies, that traffic to travel websites has been decreasing since September. The traffic in general that we are seeing in September October in particular in our Search product, which are people who actively say they want to go and travel somewhere is certainly down versus summer. And it’s down more than what you would seasonably typically see.

This downtrend in search has actually amounted to a decrease in revenues in North America of almost $1.5 million year-over-year which explains to a large extent why we are seeing such unsatisfactory results in North America. We have been, however, as we have pointed out, earlier in other calls this year, we have been working since the beginning of the year on a new Search product.

The metasearch product which is now better internally and we are hoping that we can launch it next month, but we plan to launch it definitely this year in 2008. And it will provide a much better experience. There we will be starting from zero so it’s a growth opportunity for us.

Ed Woo – Wedbush Morgan Securities Inc.

The last question I had was do you anticipate any changes to subscriber acquisition? Is it maybe cheaper for you to acquire new customers now that it seems like advertising across the board has decreased?

Holger Bartel

As you saw from the numbers CPAs have been remaining relatively stable. That is a good thing as in the past few years we have seen CPAs continuously go up. So we are pleased with that. I would say some media placements have become cheaper, yes, that is correct. But also the placements that have been working very well for us, we have not seen that prices are going down there as it often is the placements that drive revenue.

You know if you think about what I said about the search volume, just the search volume and search traffic that you would be able to get from search engines such as Google and Yahoo the search volume has been going down. The number of companies who are competing to acquire these clicks that come from Google still remains still high. So you don’t necessarily see prices going down there, at least not yet.

But on the other side of the coin that’s a benefit for us, because with our Push Media we are able to provide incremental demand beyond the demand that already exists in the market.

Operator

(Operator Instructions). Your next question comes from Michael Millman – Soleil Securities.

Michael Millman – Soleil Securities

Thank you. I guess more in the same vein. I suppose I was struck by how both Yahoo and eBay particularly pointed out the weakness that they were seeing in the travel sector for advertising. So maybe you can talk about degree or if there’s something unusual that makes them stand out?

And secondly, maybe talk a little bit about what competition you’re seeing from some of the OTAs who are now pushing advertising either on their social platforms and even on their transaction platforms. And then, could you explain what you mean by your metasearch product?

Holger Bartel

Maybe let me start with the last question first. The product in the search space that we are operating right now, our Super Search product, allows the user to tell us where and when they would like to travel. And then we recommend them an option of what sides – where they should look for deals for that specific trip.

However, the user has to visit each website individually. Over the past two years, new form of search for travel which in the industry is called metasearch has come up. It allows users to compare websites or within one single search. These websites have become very popular in particular this year. And this is what our metasearch product will do as well.

You don’t have to visit a thousand different websites anymore, to find the best price. You can do it all within one search. For us, we are very excited about this because we see high degrees of synergy between our deals publishing business and the metasearch business.

For example, we are hoping that we can show travel deals within the search environment. And on the other hand, the metasearch should also allow us to provide better content for the deal publications.

In terms of your other two questions, overall as I have mentioned, it seems traffic to travel site in general is down, so sites that are only looking on search, only booking and fulfilling travel needs for consumers are seeing a decrease in traffic and this could likely continue, a decrease in traffic and bookings. You probably have to ask the OTAs over their upcoming earnings calls how the economy affects their business. On our side, yes, we see a downturn in Search, but on the other hand we see an increase in need of travel providers to promote their inventory.

And last but not least, we are now seeing some of the best travel deals we have seen in the last four to five years. Almost travel deals that are as good as they were after the period after September 11, 2001.

We hope that this is something that Travelzoo users will see over time, that even in this difficult economic environment, Travelzoo provides you with the opportunity to still go on a trip because we are telling them about – know how you can do a cruise for $99 for four days and not only how you have to spend $2,000 to get away for a vacation.

Operator

We have no more questions at this time, so I’d like to turn the call back to Mr. Bartel.

Holger Bartel

Ladies and gentleman, we thank you for your support. We look forward to speaking with you again next quarter and have a nice day. Good-bye.

Operator

Thank you ladies and gentleman, this concludes today’s teleconference. You may disconnect your lines at this time, and have a nice day.

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