The weak macro conditions and lower revenue from Local Deals and Supersearch led to a slowdown in Travelzoo's (NASDAQ:TZOO) business in Q3 2012. However, driven by higher revenue from Local Deals and growing strength in its Getaway platform, the company saw a 4% sequential and 5% annual increase in its Q4 2012 earnings (see "Local Deals And Getaway Platform Lift Travelzoo's Earnings, Outlook").
While higher revenue from travel and Local Deals contributed to a year-over-year growth in both North America and Europe, Travelzoo's search revenue continued declining in Q4 2012. Besides macro headwinds, reduced spending by certain online bookings engines, airlines, and vacation packagers has impacted the number of searches on Travelzoo's websites. The growth in number of searches slowed down to 2.4% in 2012, as compared to 11.2% and 8.5% in 2010 and 2011, respectively.
While we forecast a continuous decline in searches via Supersearch, we estimate the searches on Fly.com to register year-over-year growth for the rest of our review period. We believe that the increasing marketing spend on Fly.com, the introduction of the hotel bookings platform and the expanding mobile platform, will help revive growth in travel searches.
Diverting Marketing Spend Away From Supersearch.com
Travelzoo's search division includes revenues from both Fly.com, a travel search engine, and Supersearch, a pay-per-click travel search tool. While Travelzoo registered an increase in searches via Fly.com in 2012, the number of searches on Supersearch has declined over the years as it diverts its marketing spend away from Supersearch, and toward Fly.com.
While Travelzoo is looking toward a strategic review of its Supersearch product to stabilize the decline in the number of searches, it is also investing heavily in further developing the Fly.com platform. It claims Fly.com is superior in technology compared to Supersearch.com.
Fly.com is Travelzoo's main focus with regard to its search business and an important part of its growth strategy. The company is taking a strong interest in the product and incurring heavy marketing spend on the same. It claims to have incurred relatively higher spending on its search platform in Q4 2012.
Development of Hotel Booking Platform to Fuel Searches
Initially, Fly.com was only an airfare search engine enabling users to find and compare flight options and real-time fares from hundreds of airlines and major travel websites. In November 2011, Travelzoo officially launched a hotel and car rental search functionality on Fly.com. After entering the search criteria, results can be filtered in several different ways to best fit travelers' needs, which include pricing, star-rating, location, amenities, and type of property (resort, hotel, B&B, or even hostel).
However, believing that its hotel search offerings was not meeting the needs of users and hotel owners, Travelzoo has decided to launch its own hotel booking platform. It has been incurring increasing development costs for building its hotel booking platform. While the increase in investments might hurt short-term growth, we expect it to play a crucial role to spur long-term search growth.
The new hotel booking platform will enable users to book hotels directly via Travelzoo's website or through mobile products. Since hotel bookings offer higher revenue per traveler compared to airlines, we think that improvising its hotel offerings should augur well for the number of searches on Travelzoo's websites.
Expanding Mobile User Base to Fuel Fly.com Searches
Enhancing and developing new mobile applications and focusing on improving conversion rates on its mobile platform are some of the key strategic areas for Travelzoo. The company intends to transform the entire product organization to a mobile first organization this year.
While Supersearch continues to be very popular with OTAs because it delivers extremely efficient bookings, the company claims that the product is relatively time consuming for users compared to newer comparison models and is not so suitable for mobile. We believe that Fly.com is better positioned to leverage growth in the mobile user base, which in turn can lead to higher search queries for Travelzoo.
The Travelzoo application has been downloaded by 1.5 million people so far and mobile traffic accounts for one-third of the total traffic on Travelzoo’s websites. We expect this proportion to significantly increase in the future.
Our price estimate of $23.01 for Travelzoo is almost in line with the current market price.
Disclosure: No positions.