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Executives

Holger Bartel – Chief Executive Officer

Wayne Lee – Chief Financial Officer

Chris Loughlin – Executive Vice President, Europe

Analysts

Marianne Wolk – Susquehanna Financial Group

John Lewis – Osmium Partners

Edward Woo – Wedbush Morgan Securities

Travelzoo Inc. (TZOO) Q1 2009 Earnings Call April 27, 2009 11:00 AM ET

Operator

Welcome to the Travelzoo first quarter 2009 financial results conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Holger Bartel, Travelzoo's Chief Financial Officer. Please go ahead, sir.

Holger Bartel

Good morning and thank you all for joining us today for Travelzoo's first quarter 2009 financial results conference call. I am Holger Bartel, actually the Chief Executive Officer. 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 morning everybody.

Holger Bartel

Before we begin, Wayne will walk you through today's format.

Wayne Lee

First, we'll discuss the company's first quarter 2009 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 calls 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 Website 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 Q1 2009 results.

Holger Bartel

Today Travelzoo announced its results for the first quarter of 2009. Diluted earnings per share for Q1 2009 were $0.02, up from a diluted loss per share of $0.07 in the prior year period. Our revenues increased to a record level of $23.4 million in Q1 2009. That is an increase of 12% over revenue of $20.9 million in the same period last year.

Quarterly sequential revenue increased 18% from Q4 2008 to Q1 2009. I will now turn back to Wayne to discuss addition 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

Our North America business segment revenue in Q1 2009 was $20 million, an increase of 6% year-over-year. Our Europe business segment revenue in Q1 2009 was $3 million, an increase of 45% year-over-year. In local currency terms, revenue increased 100% year-over-year. Our Asia-Pacific business segment generated $388,000 of revenue in Q1 of 2009, compared to $20,000 in the prior year period.

In terms of revenue concentration, Travelzoo had one group of advertisers under common control that accounted for 13% of revenue in Q1 2009. No other group of advertisers accounted for 10% or more of revenue.

Travelzoo's operating income in Q1 2009 was $2.8 million, up from Q1 2008 operating income of $1.3 million. Operating margin in Q1 2009 was 12.1%, up from 6.1% in Q1 2008. Travelzoo's net income in Q1 2009 was $338,000, up from Q1 2008 net loss of $1 million.

The company recorded $2.3 million of income tax expense on income from our operations in the U.S. The $3.2 million of losses in Q1 2009 from our Asia-Pacific and Europe business segments were treated as having no recognizable tax benefit. Cash provided by operations in Q1 2009 was $2.1 million.

DSO, that is day sales outstanding, as of March 31, 2009 was 50 days, down from 55 days as of December 31, 2008. Total cash and cash equivalents as of March 31, 2009 increased to $15.6 million from $14.2 million as of December 31, 2008.

In terms of headcount, Travelzoo had 206 employees as of March 31, 2009, up from 178 employees as of March 31, 2008, and down from 214 employees as of December 31, 2008. As of March 31, 2009, 108 of our employees were in North America, 38 employees were in Asia-Pacific and 60 employees were in Europe. Average annualized revenue per employee in Q1 2009 was $454,000, down from $471,000 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 U.S. 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 Q1 2009 was $8.8 million, up from $8.6 million in Q1 2008. Sales and marketing expense as a percentage of revenue decreased to 43.8% in Q1 2009 from 45.6% in Q1 2008.

The increase in sales and marketing expense from Q1 2008 was primarily due to a $531,000 increase in salary and employee-related expenses and a $173,000 increase on spending for subscriber acquisition campaigns, offset by a $419,000 increase, I'm sorry, a $419,000 decrease in spending on brand marketing campaigns.

In North America general and administrative expense was $4.3 million in Q1 2009, up from $3.6 million in Q1 2008. The increase from Q1 2008 was primarily due to a $401,000 increase in salary and employee related expenses and a $157,000 increase in bad debt expense.

North America operating profit for Q1 2009 was $5.8 million, down from $6.3 million for the same period last year. Operating margin for Q1 2009 was 29% compared to 33.1% 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 Q1 2009 was $923,000, down from $1.6 million in Q1 2008. The decrease in sales and marketing expense was due primarily to a $827,000 decrease in spending on subscriber acquisition campaigns.

Asia-Pacific general and administrative expense in Q1 2009 was $1.1 million, unchanged from Q1 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 $1.7 million in Q1 2009, compared to an operating loss of $2.7 million in Q1 2008.

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 Q1 2009 was $2.6 million, down from $3.1 million in Q1 2008.

The decrease from Q1 2008 was primarily due to a $501,000 decrease in spending on subscriber acquisition campaigns. In Europe total general and administrative expense in Q1 2009 was $1.5 million, up from $1.1 million in Q1 2008. The increase from Q1 2008 was due primarily to a $320,000 increase in salary and employee-related expenses. Travelzoo began operations in Germany in September 2006, in France in March 2007, and in May 2008 began publishing our website and weekly Top 20 list in Spain after having operated our sales office in Barcelona since November 2006.

Our Europe business segment incurred an operating loss of $1.3 million in Q1 2009, compared to an operating loss of $2.2 million in Q1 2008. 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 Q1 2009, Travelzoo added a total of 1.2 million new subscribers to its email publications. In North America, we acquired 720,000 subscribers at an average cost of $2.29 per subscriber in Q1 2009. This compares to 488,000 subscribers at an average cost of $2.75 in Q4 2008. In North America, Travelzoo's Top 20 newsletter and Newsflash email alert service had a net unduplicated total of 11.7 million subscribers at the end of March 31, 2009. This represents an increase of 7% versus the same time last year.

In Asia-Pacific we acquired 183,000 subscribers at an average cost of $2.23 in Q1 2009 compared to 85,000 subscribers at an average cost of $2.66 per subscriber in Q4 2008. In Asia-Pacific, Travelzoo's Top 20 newsletter and Newsflash email alert service had a net unduplicated total of 1.3 million subscribers as of March 31, 2009. This represents an increase of 116% versus the same time last year.

In Europe we acquired 295,000 subscribers at an average cost of $3.09 per subscriber in Q1 2009, compared to 160,000 subscribers at an average cost of $3.32 in Q4 2008. In Europe, Travelzoo's Top 20 newsletter and email Newsflash alert service had a net unduplicated total of 2.5 million subscribers as of March 31, 2009, an increase of 46% versus the same time last year. I just want to remind us that the cost of our subscriber acquisition in North America, Asia-Pacific and Europe are all 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, and 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 the local expertise. We have built a unique global network of more than 100 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 the Travelzoo management team focused on both cost management and reigniting growth in North America. While we can see the renewed growth transpire in North American revenues, improvements on the operating margin are less visible. This is due to the launch of our metasearch product at fly.com.

In Q2 we plan to continue our strategy of investing into subscriber acquisition, particularly in North American, Europe and Japan. In the past, we have found audience growth to be a key driver of future revenues and profits.

Let me give you an example. In the U.S. the number of Top 20 subscribers increased only marginally during 2008. However, since the beginning of this year, that audience has grown by 7%. Consumers worldwide are looking for great values in flights, hotels, cruises and vacations, and we believe that we deliver the most global and the highest quality deal content in the industry.

We also plan to continue to manage costs closely given the challenging macro environment. We plan to also continue our expansion into shows, events and entertainment content throughout 2009; our metasearch engine launched in a beta version in February at fly.com. We plan to invest in its growth throughout the remainder of the year, and we see particular opportunity in cross promoting deal content between Travelzoo and fly.com.

As in the past Travelzoo’s consistent practice is not to provide guidance for future periods because of the dynamics of the industry. Therefore, this will now conclude our prepared discussions, and I will turn the call back to the operator for the question and answer session.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Marianne Wolk – Susquehanna.

Marianne Wolk – Susquehanna Financial Group

Yes, I had two questions. The first one was for Wayne. Did you report any stock compensation expense this quarter? And secondly, it looked like the cash from the exercise of stock options was very significant this quarter, certainly relative to the past years. Can you talk about when you issued options and in what context?

Then finally I looked like subscriber counts in North America really picked up and were really impressive. Could you talk a little bit about what’s changed that enabled you to generate so much more interest in the current timeframe? I mean if this is countercyclical, I think I would have seen it since last September so I’m just trying to understand what changed over the last few months. Thanks very much.

Holger Bartel

Hi, Marianne. So Wayne will indeed answer the first part of your question, and then I will address the subscriber acquisition.

Wayne Lee

Yes, hi Marianne. We did not have any stock option compensation in Q1. The cash from the option exercise that you see in Q1, that was from the exercise of existing options. These are options granted back in 2001. It was about 2, 158,000 options that were exercised.

Holger Bartel

Regarding subscriber acquisition, Marianne, we are indeed very pleased with the performance. In fact, when I look at the numbers at Q1 2009 and compare them to the previous year, we spent in Q1 2009 $2.96 million in subscriber acquisition. A year ago in Q1 2008 that was $4.11 million; however, we added this year in Q1 1.19 million subscribers which compares to 1.05 million last year. There’s a number of reasons explaining this.

First and foremost, I think it’s much better execution on our side. We have internally refocused the team. We added some more talent and we feel we are doing a much better job on this. Second, media prices are going down as you can probably imagine, so that helps as well.

And third and last but not least, as I mentioned earlier, consumers are really looking for deals right now, so it’s a good opportunity for us to promote our services. But even on the organic side a lot of people are just flocking to our site and are signing up because they hear from some of their friends, family and colleagues about values that we promote in the Top 20 newsletter.

Marianne Wolk - Susquehanna Financial Group

This is just a follow-up. The large group, that I think, contributed about 13% of revenue, can you remind me what that was in Q4 and also last year? And was that part of the growth that you saw this year or this quarter?

Holger Bartel

Wayne, can you please answer this?

Wayne Lee

Sure. Marianne the same customers use Orbitz and their spending has basically remained the same.

Operator

(Operator instructions) Our next question comes from John Lewis – Osmium Partners.

John Lewis – Osmium Partners

Hi, good morning guys. Just two quick questions if I can. In your 2008 annual report, you guys mention or allude to the fact that you’re considering strategic alternatives for Asia. Can you give us an update or a feel for some of those potential outcomes?

Holger Bartel

Hello, John. Wayne will answer this.

Wayne Lee

So we are unable to comment, in terms of what specifically we are looking at, at this time, but this is something that is still ongoing.

Holger Bartel

John, I'd like to add we were obviously not very not pleased with the performance in Asia-Pacific last year. We incurred very high costs. Revenues were still very slim. So it's obvious that we need to think about what are we continuing to do. How much are we continuing to invest? What other options do we have? It's a very natural and a very smart thing for a company like ours to do.

We feel, if you look now at the numbers for Q1, we feel that we are making progress. We have become much more careful on the cost side. We have become more careful on where we invest in subscriber acquisition. We do it in markets where we see revenues picking up. So the situation in Q1 is improving, but we still incur a significant loss in Asia-Pacific, so obviously we are looking for what do we want to do in this area.

John Lewis – Osmium Partners

Okay, great. I appreciate the comments here. Then on fly.com, I'd really like to say that it looks great, and I guess I'm just curious. I think you guys mentioned in a press release you're going to take that to Europe later in 2009.

And I was curious, and I know it's in beta now, but do you have any feel on what the customer acquisition cost would look like? You obviously have the big subscriber base and you could cross market it to it. And then I guess the last part of the question is can you kind of explain in general terms how that site generates revenue?

Holger Bartel

It's still very early, so it's difficult to comment on specific metrics. We launched the site in beta on February 9th. We were pleased with the initial comments on the site. We generated by now about 1 million searches on the site. Regarding specific timing of when we launch in Europe, there's no concrete time planned yet. We really hope we can do this sometime in summer, but nothing is concrete yet.

And I'd also like to add maybe that revenues were very insignificant during Q1. So while we are very happy with the revenues overall for Travelzoo, there's not much that came from fly.com. I think for us fly.com is really an opportunity to link it up with Travelzoo to showcase deals on the fly.com website. It will also allow us to make the deal content our Travelzoo better. That's the main strategy behind fly.com, not so much to see it as a completely brand new business activity that is by itself.

Operator

Our next question comes from Ed Woo – Wedbush.

Edward Woo – Wedbush Morgan Securities

Yes, was there any change in business momentum during the quarter and up to even now?

Holger Bartel

Hi, Ed. Let me maybe ask Chris first what he sees in Europe on that front.

Chris Loughlin

Certainly. I think about week two in Europe everyone sort of wakes up from the holidays and things really start to get motoring. On the revenue side we did see a real peak here in Europe in the first few weeks. On the traffic side, the end of March we actually had our best week ever in the U.K., Top 20 newsletter. So in general it was just a very good 12 weeks for us.

Holger Bartel

If I may add a few words for North America, in North America, we have a situation where competition is certainly increasing. What does that mean for us? On the user side it means we need to continue applying the highest quality standards for our deals, and we really need to communicate what makes us different.

We are the only ones operating a test booking center. We have the strictest dealer use in the industry. On the advertiser side, it's a mixed bag. You know, on the one hand the travel suppliers have a lot more empty seats, rooms and cabins. They are looking to promote deals. That continues in Q2, compared to Q1.

On the other hand, given the economy the advertisers are also more risk adverse. Most of our media is priced at flat rates, so what that means is that some advertisers are more hesitant to spend the money upfront. But what we need to do is we just need to communicate much better to our travel partners what results we are driving.

And there we have a few cases from last quarter that are really impressive. We had a hotel in London into which we booked a 1,100 room nights. We had last week a hotel into which we booked $850,000 from a single Top 20 inclusion.

An airline that ran a newsflash with us, their load factor increased by 15% on the route they promoted. And we had a cruise line that promoted, an Alaska cruise that generated over $1.3 million in bookings from a single Top 20 inclusion.

So we need to be very active in communicating these results to the travel companies we work with because overall, we feel that we have a strong media. We have a strong audience that delivers well in these tough economic times.

Edward Woo – Wedbush Morgan Securities

Going back to your earlier statement about focusing on Japan and Asia, what does that mean about the rest of Asia?

Holger Bartel

It means we continue to operate in and invest in all three countries. I just highlighted Japan because Japan we see in the near term as the best opportunity for us. Among all the countries in Asia-Pacific Japan exhibits the highest revenues.

We are selling very well, so it's justified to invest more in subscriber acquisition there versus the other countries. But actually I just returned from a trip to China, and China I definitely see as a great opportunity for us, as well; maybe not as immediate as Japan. It will take a little bit longer in China, but I actually think all the markets we operate in Asia-Pacific are very exciting opportunities for our brand.

Operator

And with no further questions at this time, I'll now turn it back over to Mr. Bartel.

Holger Bartel

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

Operator

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect your lines at this time. Have a great day.

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Source: Travelzoo Inc. Q1 2009 Earnings Call Transcript
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