Good morning everyone and welcome to the Travelzoo Fourth Quarter 2012 Financial Results Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for questions following the presentation. Today's call is being recorded.
It is now my pleasure to turn the floor over to your host Chris Loughlin, Travelzoo’s Chief Executive Officer. Sir you may begin.
Thank you, operator. Good morning and thank you for joining us today on Travelzoo’s fourth quarter 2012 financial results conference call. I am Chris Loughlin, Chief Executive Officer. With me today is Glen Ceremony, the company's Chief Financial Officer. Glen will walk you through today's format.
Thank you Chris and good morning everyone. Thank you for joining us. Before we begin our presentation, we would like to remind you that all statements made during this conference call and presented in our 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 our Form’s 10-Q and 10-K and other periodic filings with the SEC. Please note that this call is being webcast from our investor relations website at www.travelzoo.com/earnings. Please refer to our website for important information including our earnings press release issued earlier this morning along with the slides that accompany today's prepared remarks. An archived recording of this conference call will be available on the Travelzoo investor relations website at www.travelzoo.com/ir beginning app 90 minutes after the conclusion of this call.
For the format of today's call, I will review our fourth quarter financial results and then Chris will provide you an update on our strategy. Thereafter, we will open up the call for our question-and-answer session. Now please open our management presentation to follow along with our prepared remarks. The presentation is available at www.travelzoo.com/earnings.
Slide three provides the key financial highlights for the quarter. Our revenue came in at $37 million this quarter representing a 5% year-over-year growth. Our earnings per share this quarter was $0.24 which is lower than prior years due to our investments in sales force expansion, marketing and our hotel booking platform. In addition, we saw growth in new subscribers.
Slide four highlights the revenue by segment. Revenue in North America was $26.4 million, representing a year-over-year growth of 3%. In Europe, revenue was $10.7 million, representing a year-over-year growth of 10%.
On slide five, the North America year-over-year revenue increase of $900,000 was driven by the increase in our local and search revenue. The local revenue increase is driven primarily by the increase in our sales force that resulted in more deals being published offset with the reduced number of vouchers sold per deal. The search revenue increase was due to fact that last year, due to market factors, we pulled back more significantly on spend than we did this year. We still are impacted by some of the trends in travel that we highlighted in prior quarters such as reduced spending by certain online booking engines, airlines and vacation packagers. However, this is offset by our over 50% growth in our Getaway format for hotel. The Getaway’s are also the primary driver of the 1.3 million sequential growth in travel.
On slide six, the Europe year-over-year revenue increased $900,000 was due primarily to our travel revenue. We are pleased to see that our investments in our sales force are starting to pay off in Europe.
Slide seven provides some detail on our operating income and net income. We generated $4.4 million in overall operating income, of which $1 million was from Europe and the rest was from North America. Our investments in expanding our sales force increasing our subscriber marketing as well as the development of our hotel booking platform all have lowered our current operating income, yet we believe that these are sound investments for future growth. Our tax rate had a favorable impact this quarter of approximately $800,000 related to the release of a portion of our valuation allowance on our European deferred tax assets. We expect to incur tax expense on our European income going forward.
Slide eight shows that cost of revenue remained fairly stable with a tradeoff between lower subscriber refunds and some higher customer service cost. Our operating margin was similar to last quarter’s margin impacted by our continued investments.
Slide nine captures our operating expenses. Our North America operating expenses increased year-over-year by $3.9 million due primarily to a $1.8 million increase from our headcount related investments and another $1.8 million of incremental subscriber and search marketing costs. Europe’s operating expenses increased for these investments as well. We expect increased operating expenses next quarter from the continued ramp up of headcount related costs, increased marketing, legal and professional fees and increasing development costs for our hotel booking platform.
Slide 10 shows that our headcount increased by 10 full-time employees this quarter from 407 to 417. We continued our hiring this quarter however we slowed the relative pace of hiring. We are on-track with our goal of hiring 50 additional sales staff that we said at the end of Q1 and feel confident that this is still a worthy investment for future growth. We are monitoring the productivity of the sales force and continue to believe they or on-track to fully ramp up over the estimated six to 12 months that we have experienced in the past.
Moving to slide 11, you can see that we are maintaining solid collections and growing our cash balance. We ended the quarter with $61.2 million in cash and cash equivalents up from the prior quarter as a result of our operating cash flow of $13 million offset by a $7.9 million spend on our stock repurchases.
Turning to slide 12, in summary, we had a solid quarter showing revenue growth in both of our segments. Although our operating income was clearly impacted by our investments, we believe that these investments are the right thing to do for our future growth. And lastly, we are maintaining our strong financial position with positive cash flow, growing cash and no debt.
That concludes the financial summary of our fourth quarter of 2012. So now Chris will provide an update on Travelzoo’s strategy to drive future growth.
Thank you, Glen and hello again everybody. As Glen highlighted, we are very pleased with the solid quarter and confident in both our business model and our investments in people, audience and products. These are the inputs that will drive future growth.
Indeed, we are entering our 15th year of business prudent investment has guided us to a decade and a half of profitable growth. For those new to the Travelzoo story, you should know that this business was started with less than $50,000 in 1998. For our entire history we’ve been very focused on profitability. We have demonstrated now standing return on assets. We are very thoughtful of our investment strategy and we balance our desire to grow for the long term with a keen eye on the bottomline.
The chart on the left shows you how our business grows. On the X axis you can see we are growing our subscribers. On the Y axis, we are increasing our revenue per subscriber overtime. Our current investment strategy is focused in three areas. First, we are growing our sales force. This allows us to work with more businesses and publish more deals. Second, we are investing in our audience growth, not just by expanding our traditional email subscriber base, but by increasing our Facebook fans, Twitter followers and downloads to our iPhone and Android Apps. And third, we are investing in product development. We are focused on improving our engagement and conversion levels and enhancing our product in mobile and hotels.
Let's turn to the next slide and review how we are doing. Slide 15 highlights our progress against our sales force expansion plan. As Glen mentioned at the end of Q1 we set a goal of hiring 50 additional sales staff worldwide to drive future revenue growth.
On the left, you can see that we made good progress adding 30 sales staff net of attrition. We continue to ramp up to a goal of 171 but we moderate our pace based on balancing our needs for investment and delivering our profit goals.
On the right, you can see how our investment in sales force is indeed paying off over time. As you can see, we are publishing more deals in both North America and in Europe.
On the lower right, you can see the growth in our getaways business which is up 65% since last year. Across the business, we expect sellers to take approximately a year to become fully productive.
Moving to slide 16, we look around next strategic element, invest in audience growth. On the left, you can see how over time audience growth has been the key driver of our revenue growth. The growth of our audience isn't just about investing into subscribers. We also invest into Facebook and Twitter and other media as well.
Our purchase part optimization efforts which we said we would focus on last quarter have proved quite successful. We've increased our conversion rate by 16% since the last quarter. We've also improved the visual experience of our website and now we are experimenting the photos in our Top 20.
We noticed improved click-through rates of 14% and improved sell-through rates of 12%. Q4 was in fact one of the strongest quarters for us in terms of engagement with our subscribers. We are also starting to capture user reviews.
In Q4, our subscribers provided just shy of 60,000 reviews. We are currently using these to inform our deal experts enhance the experience that our subscribers have. In the future, we plan to use those reviews to also enhance our products, so you can imagine reviews next to our deals.
On slide 17, you can see we are making terrific inroads into mobile and social. Our apps are being downloaded by 1.5 million people and we get a 4.5 Star rating on the App Store. We are determined to grow our in-store base, improve the usability of our apps and we want to get that 5 Star rating.
We are particularly excited to see that those who have installed the app or engaging with the Travelzoo brand while traveling away from home. Traditionally, Travelzoo was a brand that got you there. Increasingly, we are a brand that helps you when you get there.
In social media, especially in Facebook, we are seeing increased interest in our brand and higher levels of engagement. Of the 400,000 people or so who like us on Facebook, we saw 60,000 actions be it likes or comments in Q4. You can see on the right some of the comments that our fans made.
On slide 18, this gives you a glimpse of how we are engaging in a two-way dialogue with our audience and how the experience goes full circle from the customer’s perspective.
On the left, our subscribers are commenting on deals on our website. Those messages then go to their friends via Facebook. These people might not be Travelzoo subscribers but this is how they learn about Travelzoo through their friends. Once a subscriber has enjoyed a deal then they comment back through our feedback loop. And this you can see on the right.
In this case, you can see there are 62 people to provide a feedback for a deal of Porter's Steakhouse in St. Louis had a 97% positive experience. These new interactions with our subscribers are deepening our relationship and bring even more trust to our brand.
Turning to slide 19 is our third strategic element, investing in product. Mobile traffic is already one-third of our entire traffic and we expect this to increase considerably over the coming years. Our brand and content are perfect for this type of medium and we think its travel, entertainment and local deals, perfectly suited for that medium.
We're shifting our product focus to mobile and expect to transform our entire product organization to a mobile first organization this year. On the left, you can see some of the challenges we face in mobile today.
When we hand off to this particular hotel, to the booking engine, it just doesn’t work on mobile and the reason is because we can’t pass the discount code that’s inside the URL on to the mobile browser. So, as crazy as it seems for this particular hotel and here we are in 2013. We actually have to write, this deal cannot be booked on a mobile device. You have to call the 1800 number.
Now obviously that’s not right and we want to solve that. To solve the journey and to provide easier search ability of our deals, say for example to allow people to find the deal on a specific date and the places they want to go to, we're developing a hotel booking platforms.
The platform will allow users to very quickly find those deals on the dates and in the places where they want to go. Hotels will also find it easier as well. For example, if a hotel wanted to quickly load a last minute weekend rate, they could do it themselves through the system rather than calling somebody at our office or working through our manual processes.
Slide 20 lays out our timeline through 2013 to develop and rollout hotel booking platform. The initiative will take some time to roll out. The investment will primarily be in Q1 and Q2. In addition to the actual booking engine technology, we'll overhaul some of our contents through our existing team, integrate with our existing systems.
For example, we have well over a million people who have bought local deals with us and have accounts for those we want to integrate with those people. And again, most of this will happen in the first half. We will be prudent and balance on need for change into this type of model with a fact that we have got a very profitable and robust model already in place.
We are excited about the opportunity we have to get this right and provide both our subscribers and our hotels with a more superior solution than we offer today.
Turning to slide 21, I want to remind everybody that quality underpins everything that we do. I have spent several weeks in December speaking with our subscribers and it’s very, very clear that those who use Travelzoo understand that we offer higher quality content than the others.
Quality experience is repeat and referral behavior making our brand thrive over the long-term. I spoke to one subscriber in Ontario and the first thing he said to me was honestly I don’t refer the products but I can’t tell you how many people I have told about Travelzoo.
As I said at the beginning of my comments, we are now in our 15th year of business. Since the beginning it’s always been about quality and for us it will be about quality long into the future.
So concluding on slide 22, our areas of focus for this year are first and foremost to maintain our quality leadership position by publishing high quality deals and [tiny] brand control. We accelerate top line and long-term revenues by investing primarily in sales force productivity and new subscribers. Continue to enhance and scale our new products particularly by enabling our online booking capability for hotels and becoming a mobile first business over time. And we will seek to enhance our engagement through product to development, analytics and optimization.
And lastly, we are going to invest in future growth well remaining profitable. Thank you for joining us, this concludes our prepared remarks.
Now, I turn back to the operator for the question and answer session, thank you.
(Operator Instructions) Our first question comes from the line of Dan Kurnos from the Benchmark Company.
Dan Kurnos - Benchmark Company
Just the few things from me, in terms of unduplicated subs, growth was a little bit muted sequentially although, you didn't call out some pullback and spend in Europe. Just wondering what should we expect in terms of growth going forward, should we expect to see it accelerate through 2013 and which channels have you guys found most effective so far?
We were very pleased actually with the audience particularly on Facebook in Q4. We added over 200,000 fans and we saw highest engagement level we have seen with 60,000 posts to comments, that was the key focus for us in the quarter.
And we are beginning to look holistically at our interactions with our audience. So, while traditionally Travelzoo has been about the-mail interaction. We are seeing real benefits through social media, Facebook, Twitter and mobile. We plan to keep our foot on the accelerator with our investment but obviously we will pullback, if we are unable to pull off our profit targets.
Dan Kurnos - Benchmark Company
Okay, great. And then on travel, could you maybe give us some more color on how much of the 23% growth in Europe was getaways versus your traditional travel model. Then on, just on getaways in general maybe if you could give us sort of a broad brush picture of how much runway you think you have in the getaways markets and which geographies look most promising to you near-term?
Glen, do you want to answer first half of the question, I can talk a bit more about the markets and so forth.
Sure Dan. So you are saying that 23%, we don't split out the getaways portion, but a significant piece of that is the getaways. So we are pleased with the growth that overall growth is 65% and on the getaways overall helps Europe as well, but not entirely that in Europe, so we are happy with that kind of curve there in Q4 of 23%. Does that answer your question? Yeah, go ahead Chris.
Yeah and the runway is this, I said this on the last call. At the moment what we are doing is we’re sending out a getaway to a subscriber, the subscriber we have a great relationship with and they may or may not wish to purchase that particular getaway. If that person comes to our website and wants to find a deal on a specific date that's quite difficult for them to do and its even more difficult on our mobile app. So one of the runways is actually just providing better visibility to the opportunities for those who want to go, that's the whole idea around our hotel booking platform.
Another opportunity within that business is that one of the key reasons why people are refunding is because they can't get the dates they want. They’ll buy a voucher and then they can't get the date that they want. By having the hotel booking system we can give you date visibility right away. We are obviously ramping our sales force and that does mean that we are bringing on more territories. We are now publishing deals down in Tennessee and in and around Nashville, which were not classically a focus for Travelzoo. So we will continue to do that and also I think you will start to see people being able to just by getting better access to information we hope to see improved conversion rates overall.
Dan Kurnos - Benchmark Company
All right and then turning to local it looks like we've seen sort of at the standard slower start to the year particularly in the U.K., but obviously had a pretty strong Q4. I'm just curious how you feel about where you are in local and general. I know you talked about the analytics changes and you are still ramping headcount, but maybe go into some color on some of the other changes you are making to improve conversion rates and get more attention on the local side?
Well I mean, the conversion rates we’re incredibly happy with to see such an improvement of 16% and that was a real concerted effort. The other thing we've tested in the purchase parts is reviews which we tested in the U.K. that was very positive. So people could actually see what other people saw of the place we are recommending. So over time reviews will play a bigger role in our business. We've collected over 60,000 reviews in our first quarter so that's positive.
The other thing we saw in local is an increase revenue on mobile for those local deals and one of our key ideas around these local deals is that we have a lot of travelers and we need to do a better job of communicating and messaging to those travelers that when they get to Las Vegas they get to San Diego we've got great deals that they can buy. We already see, I mean it’s a significant portion of our business but that will be a big focus for us. You will notice on the side that there are some deals that are what we call always on, so they maybe on for a couple of months. We might not send those deals out via email, really there because we're expecting tourists to use them and we're pretty excited about what that could mean for us.
Dan Kurnos - Benchmark Company
You mentioned in your prepared remarks that you want to see increased performance from the existing headcount. So I am just curious what you are doing to improve efficiencies internally and I am just also curious on how you see the availability of new talent.
On improving efficiency, I mean that’s something that we've been focused on, you know from the first day I walked in [head] through 13 years ago. We're very, very focused in this business on getting maximum efficiency, but you know it does take time for people to ramp up and yes we hired in 30 sales people. If you look at our overall headcount, we hired 71 people. So that’s really 71 people who either that there is some way of reaching productivity and of course you got attrition in there as well, which doesn’t come in to that 71. So there is probably a 100 people in this business who joined in the last 12 months and they are getting up to the highest level of productivity. On the sales side, we always say, you know, 6 to 12 months and then how we're monitoring that, we tend to group into groups of what we call vast [TJV] and then we have our beginners and we watch how people move through that cohort overtime. I think we're pretty good at that and we will continue to focus on it.
Dan Kurnos - Benchmark Company
And on the availability of the talent pool?
Yes, it's been, it’s actually been pretty good for us. We have a solid profitable business and our offices are in markets for example in New York, or Austin, or Chicago where many of the people in our industry work for competitors. So we have been able to pull quite a few fantastic people into the business, so we are pretty pleased.
Dan Kurnos - Benchmark Company
Then only one more from me if you don’t mind, I just was curious if there are any differences so when you do launch the hotel bookings platform if we should expect to see any differences in the economics between the bookings platform and say the getaways model.
Well there may well be, I think it’s too early to say. The idea was not turnoff getaways and then launch (inaudible). We will take our time, we will run some tests and then once we fully have got our arms around it then we will certainly let you know, but it’s not going to be exactly the same as getaways because we are enabling people to book. For example if you want to book in a hotel in New York this weekend through a booking engine it might be slightly different than buying a voucher.
Dan Kurnos - Benchmark Company
All right, great thanks a lot guys.
Thank you. And our next question comes from the line of Ed Woo, Ascendiant Capital.
Ed Woo - Ascendiant Capital
I had a question regarding the current state of the competition. Do you see any big changes in Q4 and also how will you characterize the current state of the travel market?
Hi, Ed. Current state of competition one of the best things I have ever done and I wish I had done it earlier as I spent most of my December speaking to our subscribers. What I can tell you is from their perspective at least the ones I spoke with Travelzoo has higher quality deals that's the first thing. The second thing is the Travelzoo doesn't send to many emails and third thing is the content in general that I am sending is what the subscribers thought they signed up for.
So I can't really say how those businesses are doing, but from our subscribers perspective the teams that it seems that they get a little tired of receiving JVC speaker set and the next minute a bikini wax and its sort of all over the place. We said that two or three years ago, you know in publishing you need to be somewhat focused. I mean, the financial times its successful because it delivers what they say they deliver.
We have been quite disciplined in staying focused on travel and leisure, and I think that’s appreciated by the subscribers. You know as far as talent there is a lot of people, and we’ve just talked about that, but lot of people who are interested in moving to a new business now and Travelzoo is one of the obvious candidates, that these people might want to move to after spending two or three years at one of the other companies.
So that's how I see it. And of course those businesses are also realizing themselves that at some point they have to become profitable. So that sort of levels are playing towards a little bit for us.
Ed Woo - Ascendiant Capital
So you haven't seen any big changes in either the economics of a deal being able to sign up new customers or new suppliers, new businesses etcetera?
Not fundamentally, and we have seen some of the smaller players go, we have seen some of the rational behavior stop, zero commissions or paying for a bill board for a restaurant just to get a deal. That seems to have stopped, but fundamentally I don't see I don't see any other significant changes.
Ed Woo - Ascendiant Capital
Okay. And how would you characterize the current travel market right now, it seems like everything used to be steadily improving slightly in the US and Europe?
I think that that's a good way to put it, its steadily improving. I think that advertisers are keen to get a head start and make sure that, there is currently no scary news anyway so that's kind of the good thing and when there's scary news about economies or natural disasters people tend to not book their travel and so there is no scary news right now which means that travel companies should really make hay while the sun shines and so I think in general everyone is quite positive.
Ed Woo - Ascendiant Capital
That's good to hear. I'll keep my fingers crossed that there is nothing major as well. Then also going into your comments about how you are making some investments in this booking engine, are you no longer primarily interested in acquiring booking engine, are you guys going to develop this yourself? And we see that the investment you did in the fourth quarter was about $0.03, is that probably similar to the investments that you will be making over the next couple of quarters?
We did a couple of things in the fourth quarter. One is we bought the assets of a booking engine company and that was the actual website was called Perfect Escapes. So we took that in, we took a group of people who we think are terrific and we are currently overhauling the system and we are looking at how we integrate into our products.
We think that the development process takes probably the next five months to sort of get the initial framework that sort of the heavy lifting. So, I think it would be fair to say that the investment level will be similar or a little bit more than we've had over the next six months and then hopefully its done then we build and we go. And of course those people who we did bring in, I mean there's no revenue coming from that product today, so by the time we get to Q3 and Q4 we expect that we should be seeing some decent revenue coming from it.
Ed Woo - Ascendiant Capital
Great. And my last question is last couple of quarters ago mentioned you guys were going to make a big investment in marketing, are we seeing that investment being spent currently and how do you view the ROI so far?
We increased our investment in subscribing marketing. I think the number was again it was $600,000 year-on-year.
Ed Woo - Ascendiant Capital
So we increased by $600,000 but this opportunity came up with this booking engine and these people and its not just about spending the money effectively, its also about management time and so a few of us were really heads down and making sure we secure those assets and bringing these new folks and setting a track for the hotel booking platform.
The other thing we focused a lot of energy on which in the end didn't cost us as much as we thought it would, it was on the Facebook thing. So there we brought in 200,000 new fans and the overall acquisition costs are significantly less than what we might have thought it would be.
So that would love to continue that in the future. We will see if we can but in general, we are keen to grow our audience on the-mail, some subscribers but also on Facebook and on mobile.
Thank you. (Operator Instructions) Our next question comes from the line of [Craig Baum from Harvest Capital].
I guys, thanks for taking my questions. So I have two questions. What drove First, what drove this search growth in the U.S. Was that SuperSearch or fly.com and then how does the profitability of search compared to travel and local and then I have one follow up?
Glenn, would you please answer these questions, and hi Craig.
Sure, yeah, in North America you're talking about, for search and in the growth on that. So that growth in that is obviously is tied to the spending level and like I said in the comments, we increased our spend relatively to last Q4 and I would say, we don't break out the SuperSearch versus Fly but you know, the spend between those two was increased this quarter. So we just felt it was a relative better market to spend this quarter for that. What is your second question, Craig?
The second one here was just how the profitability of the search compared to (inaudible) local segment?
I would say that varies. It has quite a bit but it's less than those two other businesses, relatively.
Okay, and just one point of clarification. Looks like you guys repurchased a decent chunk of shares in the quarter. Glad to see you guys have enough confidence in the business to be buying back your stock. Just curious, I know the weighted average shares on an exact number, given the timing of repurchases in the quarter but based on the information available, looks like you spent $7.9 million to repurchase about 260,000 shares, so I get an average price of about $30 am I missing something or why does that look like the repurchases were at such a high price?
Shares are higher than that they're in the order of they were cumulatively 600,000 shares and I think we disclosed last quarter we bought back about a little over 160,000 so about 439 or 440 shares.
Great. Okay, thank you. And we have no further questions I would like to turn the conference back for any concluding remarks.
Ladies and gentlemen thank you for your time and support we wish you a prosperous new year and we look forward to speaking with you again in the future. Have a nice day. Thank you.
Thank you. Ladies and gentlemen this concludes today's teleconference. You may disconnect your lines at this time and have a nice day.
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