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Travelzoo Inc. (NASDAQ:TZOO)

Q4 2008 Earnings Call Transcript

February 3, 2009 5:00 pm ET

Executives

Holger Bartel – CEO

Wayne Lee – CFO

Chris Loughlin – EVP, Europe

Analysts

Michael Millman – Millman Research Associates

Malindi Davies – Susquehanna

Operator

Good afternoon everyone, and welcome to the Travelzoo’s fourth quarter 2008 financial results conference call. (Operator instructions) Today's call is being recorded. It is now my pleasure to turn the call 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 fourth 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; and Chris Loughlin, Executive Vice President, Europe.

Wayne Lee

Hello, everyone. Welcome to our conference call.

Chris Loughlin

Good evening, everyone.

Holger Bartel

Before we begin Wayne will walk you quickly through today’s format.

Wayne Lee

First, we will discuss the company’s fourth 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.

Holger Bartel

Thank you, Wayne. Today, Travelzoo announced its results for the fourth quarter of 2008. Diluted loss per share for Q4 2008 was $0.01, down from diluted earnings per share of $0.00 in the prior year period. Our revenue increased to $19.9 million in Q4 2008, an increase of 4% over revenue of $19.1 million in the same period last year. Quarterly sequential revenue increased 6% from Q3 2008 to Q4 2008.

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, including headcount, expenses and operating results.

Wayne Lee

Thank you, Holger. Our North America business segment revenue in Q4 2008 was $17.2 million, a decrease of 2% year over year. Our Europe business segment revenue in Q4 2008 was $2.4 million, an increase of 65% year over year. In local currency terms, revenue increased 114% year over year. Our Asia Pacific business segment generated $269,000 of revenue in Q4 2008 compared to $8,000 in the prior year period.

Revenue concentration has decreased. Travelzoo had one group of advertisers under common control that accounted for 14% of revenue in Q4 2008. No other group of advertisers accounted for 10% or more of revenue.

Travelzoo’s operating income in Q4 2008 was $509,000 down from Q4 2007 operating income of $2.5 million. Operating margin in Q4 2008 was 2.6%, down from 12.8% in Q4 2007.

Travelzoo’s net loss in Q4 2008 was $129,000, down from Q4 2007 net income of $46,000.

The company recorded $1.1 million of income tax expense on income from operations in the US. The $3 million of losses in Q4 2008 from our Asia Pacific and Europe business segments and our operations in Canada were treated as having no recognizable tax benefit. Cash used for operations in Q4 2008 was $441,000.

DSOs, that’s days sales outstanding, as of December 31, 2008 was 55 days, up from 52 days as of September 30, 2008. Total cash and cash equivalents as of December 31, 2008 decreased to $14.2 million from $15.8 million as of September 30, 2008.

In terms of headcount, Travelzoo had 214 employees as of December 31, 2008, up from 157 employees as of December 31, 2007, and up from 207 employees as of September 30, 2008. As of December 31, 2008, 107 of our employees were in North America, 51 employees were in Asia Pacific and 56 employees were in Europe.

Average annualized revenue per employee in Q4 2008 was $372,000, down from $487,000 in the same period last year. Let's now look at the expense line items of our three business segments.

For North America business segment, which consists of our operations in the US and Canada, 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 Q4 2008 was $8.4 million, up from $7.6 million in Q4 2007. Sales and marketing expenses as a percentage of revenue increased to 48.6% in Q4 2008 from 43% in Q4 2007. The increase from Q4 2007 was primarily due to a $525,000 increase in salary and employee related expenses and a $279,000 increase on subscriber acquisition campaigns.

In North America, general and administrative expense was $4.3 million in Q4 2008, up from $3.4 million in Q4 2007. The increase from Q4 2007 was primarily due to a $537,000 increase in salary and employee related expenses and a $291,000 increase in rent and office expense.

North America operating profit for Q4 2008 was $3.7 million, down from $6.4 million for the same period last year. Operating margin for Q4 2008 was 21.5% compared to 36.3% for the same period last year.

For Asia Pacific business segment, which consists of our operations in Australia, China, Hong Kong, Japan, and Taiwan, total sales and marketing expense in Q4 2008 was $1 million, down from $1.3 million in Q3 2008. The decrease in sales and marketing expense was due primarily to a $253,000 decrease in spending on subscriber acquisition campaigns. Asia Pacific general and administrative expense in Q4 2008 was $1.1 million, down from $1.2 million in Q3 2008.

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 $1.9 million in Q4 2008, compared to an operating loss of $2.3 million in Q3 2008 and an operating loss of $2.1 million in Q4 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 Q4 2008 was $2.2 million, up from $2.1 million in Q4 2007. The increase from Q4 2007 was primarily due to a $573,000 increase in salary expense, offset by a $438,000 decrease in spending on subscriber acquisition campaigns.

In Europe, total general and administrative expense in Q4 2008 was $1.4 million, and up from $1.2 million in Q4 2007.

Travelzoo began operations in Germany in September 2006, in France in March 2007, and in May 2008 began publishing our Web site and weekly Top 20 list in Spain, after having operated a sales office in Barcelona since November of 2006.

Our Europe business segment incurred an operating loss of $1.3 million in Q4 2008 compared to an operating loss of $1.9 million in Q4 2007.

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 Q4 2008, Travelzoo added a total of 733,000 new subscribers to its email publications. In North America, we acquired 488,000 subscribers, at an average cost of $2.75 per subscriber in Q4 2008 compared with 361,000 subscribers at an average cost of $3.73 in Q3 2008.

In North America, Travelzoo’s Top 20 Newsletter and Newsflash e-mail alert service had a net unduplicated total of 11.3 million subscribers as of December 31, 2008. This represents an increase of 3% versus the same time last year.

In Asia Pacific, we acquired 85,000 subscribers at an average cost of $2.66 in Q4 2008, compared to 194,000 subscribers at an average cost of $2.46 per subscriber in Q3 2008. In Asia Pacific, Travelzoo’s Top 20 Newsletter and Newsflash e-mail Alert service had a net unduplicated total of 1.1 million subscribers as of December 31, 2008. This represents an increase of 418% versus the same time last year.

Finally in Europe, we acquired 160,000 subscribers at an average cost of $3.32 per subscriber in 2008 compared to 254,000 subscribers at an average cost of $4.52 in Q3 2008. In Europe, Travelzoo’s Top 20 Newsletter and Newsflash e-mail alert service had a net unduplicated total of 2.2 million subscribers as of December 31, 2008, that's an increase of 61% versus the same time last year. The costs of our subscriber acquisition in all regions 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 run.

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. Another competitive advantage is our improved ability to source the best travel deals and perform a very high quality review by leveraging local expertise. We have built a unique global network of producers and sales staff in 11 countries in North America, Europe, and Asia Pacific. Our plan is to aggressively leverage this global network to bring Travelzoo users the very best information available.

In Q1, we will focus on cost management. We intend to streamline our operations in Asia Pacific and cut cost. We are currently proactively looking at ways in North America to increase our operating margin. In North America and in Europe, we plan to continue expanding the Travelzoo network, a network of third-party Web sites that list travel deals published by Travelzoo. Further, we plan to expand our shows and events content. Finally, we expect to launch in data this week a meta-search engine under the brand name Fly.com.

Travelzoo’s consistent practice is not to provide guidance for future periods because of the dynamics of the industry.

I’ll turn the call back to the operator now for the question and answer session.

Question-and-Answer Session

Operator

(Operator instructions) And we will move to our first question from Michael Millman with Millman Research Associates.

Michael Millman – Millman Research Associates

Thank you. Could you talk about trends, specifically, I was interested in click trends, I was interested in trends in terms of advertising relating to more hotels and more air or other or packages, I was interested in whether you're seeing more very short term promotions or almost last minute deals or more longer term, I was interested in are you seeing more resort type ads or more a large city’s luxury hotel kind of ads, and any other trends that you might be seeing that you could let us know about. Thank you.

Holger Bartel

Hello, Michael. This is a good question and it relates pretty much to a broader question of how the recession in overall, the economy, the bad economy is affecting us as a business, as a deal publishing business. Let me first talk about North America. As we all know from the news media the travel industry is very heavily affected by the economic downturn, particularly hotels and cruise lines – their business is down, occupancy rates are falling. In general, that is bad news for every travel company. I think as a travel deal publisher, however, we have an opportunity to help these companies, to help hotels, to help airlines, to help cruise lines, sell more inventory. Hotels in Hawaii are very empty these days. They turn to us and ask us to help them, bring them more consumers, more visitors who spend money over there. And the deals is what motivates our users to take these trips. It's still too early to say exactly how that will affect our business in 2009; however, we hear from our partners that we offer some solutions that are very helpful for them in these tough economic times. Let me also actually also turn over to Chris, and ask him how this is in Europe.

Chris Loughlin

Michael, Thank you. Thank you, Holger. One thing just to point out, in Europe, we are still experiencing rapid growth that we see in local currency. We are expanding at about a 100% in the last year. Just one stat I was looking at earlier today, 183,000 people typed in the brand name, Travelzoo in UK into Google in January of this year versus 36,801 in the same period last year January. Now is that because more people looking for deals? Well, certainly I get the impression that they are, but that's my own personal opinion. It may tell us that that's the case, but it also could be the fact that we’re just growing very, very quickly here in the UK. We continue to see fantastic deals across US at this time. One other thing which is quite interesting, Michael, is that international consumers across all markets are finding these deals very attractive. So, we’ve recently ran a UK hotel. It was actually in Chelsea in London, and we had subscribers from the UK, France, Germany, Spain, the US, Taiwan, Japan, and Hong Kong all booked that deal directly with the hotel in London. So it also points out helping the asset holders at this time, while the hotel booked $100,000, and that actually ran on the 30th of December. So, clearly consumers are traveling, but perhaps they do need a deal.

Michael Millman – Millman Research Associates

Just following up on that hotel, did that hotel booked in other places as well on such things as Booking.com, on Expedia, or last minute locally, or e-bookers locally?

Chris Loughlin

I wouldn't know that, I mean, I would presume most large brands, they’re working with larger (inaudible). I wouldn’t know what their relationship is with those companies. But what I just found particularly interesting, in 2005 we had the vision that we would help travelers in more markets, and now we are really seeing it, while people in Taiwan and Japan, they traditionally book packages, they really don't book directly with hotels, booking a London hotel directly.

Michael Millman – Millman Research Associates

(inaudible) seeing any effect from the weakening of the euro?

Michael Millman – Millman Research Associates

Well, I mean, in dollar terms, you see PPA on our subscribers is down to $3.32 in Europe, about 20%, 25% of that will be simply because the sterling rate devalued the benefit that we get from the euro increasing against the sterling is that our revenues are actually higher. But on an aggregate basis, our revenues of course are down in dollar terms, but in reality in sterling terms they are up quarter over quarter.

Operator

And we will move on to take our next question from Malindi Davies with Susquehanna. Malindi Davies, your line is open.

Malindi Davies – Susquehanna

Hi, good afternoon. I had a question about your DSOs increasing, could you talk about the age of your receivables, for example what percentage is over 90 days old. And then also a question about CapEx, that continues to be higher than normal, can you explain what that's related to, please?

Holger Bartel

Hello, Malindi. Wayne will take these questions.

Malindi Davies – Susquehanna

Thanks.

Wayne Lee

Yes. Hi Malindi, a question on the DSO; our DSO did increase quarter over quarter. We haven't really seen much deterioration in the over 90 days. That still remains relatively low, in the low single digits. What we do see is that some companies are now just kind of holding cash a little longer, so maybe the 31 to 60 have increased. But we really won't see this being an issue for us at this moment. And, with regards to your question on capital expenditure, we’ve spent approximately $1.5 million this past year on the development of our meta-search product which we capitalized, and we also did some infrastructure improvements with our data center, and that coupled with two office additions and relatedly [ph] hold improvements. That's what you are seeing a higher capital expenditure for this year.

Malindi Davies – Susquehanna

Thanks. So following up on the DSO question, are you seeing any – is this a trend that you are seeing across geographies or is there any difference you can talk about?

Wayne Lee

It is pretty much across all countries that we are seeing this increase in DSOs.

Malindi Davies – Susquehanna

Thanks. And then I know (inaudible) spend in 2009 on CapEx. Have you talked about, which of these projects might continue in terms of infrastructure and continuing to develop the meta-search product?

Wayne Lee

Well, the meta-search product – so we’ve just launched in data. But we will continue to develop this product in 2009 back half; I can’t give an estimate of how much we are planning on spending.

Malindi Davies – Susquehanna

Thanks.

Operator

That does conclude today's question and answer session. I’ll turn the call back now to Mr. Bartel.

Holger Bartel

Ladies and gentleman, we thank you for your support, and we look forward to speaking with you again next quarter. Have a nice evening.

Operator

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

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