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Travelzoo, Inc. (NASDAQ:TZOO)

Q1 2013 Earnings Call

April 18, 2013 11:00 am ET

Executives

Chris Loughlin - CEO

Glen Ceremony - CFO

Analysts

Dan Kurnos - The Benchmark Company

Ed Woo - Ascendiant Capital

Operator

Good morning everyone and welcome to the Travelzoo First Quarter 2013 Financial Results Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be open 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.

Chris Loughlin

Thank you, operator. Good morning and thank you for joining us today for Travelzoo’s first quarter 2013 financial results conference call. I’m 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.

Glen Ceremony

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 Forms 10-K and 10-Q 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 archive recording in 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.

For the format of today’s call, I will review our first quarter financial results and then Chris will provide an update on our strategy. Thereafter we will open 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 3 provides the key financial highlights for the quarter. Our revenue came in at $42.2 million this quarter representing 7% year-over-year growth. Our earnings per share this quarter was $0.36 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 4 highlights our revenue by segments. Revenue in North America was $29.9 million representing year-over-year growth of 5%. In Europe, revenue was $12.3 million representing year-over-year growth of 14%.

On slide 5, the North America year-over-year revenue increase of $1.3 million was driven by the increase in our travel revenue due to increased spend by certain vacation packagers as well as continued growth in our getaway voucher offering for hotels. This is offset by a decline in the local revenue from reduced number of vouchers sold per deal compared to the prior year period and a decline in search revenue.

On slide 6, the Europe year-over-year revenue increase of $1.5 million was due primarily to our travel revenue driven again by increased spend by certain vacation packagers and cruise advertisers as well as continued growth in our getaway voucher offering for hotels.

Slide 7 provides some detail on our operating income and net income. We generated $8 million in overall operating income of which $2.5 million was from Europe and the rest was from North America.

Our investment in expanding our sales force increasing our subscriber marketing as well as development of our hotel booking platform all have lowered our current operating income. However, we believe these are sound investments for future growth. Our tax rate had a favorable impact this quarter of approximately $250,000 related to certain state tax refunds which was an approximate $0.02 EPS benefit this quarter.

Slide 8 shows the cost revenue percentage decline due primarily to lower subscriber refunds. Our operating margin increased from last quarter’s margin due to seasonality and this impacted year-over-year by our continued investments.

Slide 9 captures our operating expenses. Our North America operating expenses increased year-over-year by $3.3 million due primarily to a $2.2 million increase from our headcount related investments and another $1.1 million primarily due to incremental subscriber and search marketing costs. Europe operating expenses increased due to 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 cost for our hotel booking platform. We expect incremental legal and professional fees will result in an EPS charge of approximately $0.04 next quarter.

In addition, the hotel investments will continue to back our cost with an EPS impact of approximately $0.04 next quarter. Keep in mind, after we get the hotel booking platform in place, the revenue generated from the hotel bookings will be recognized after the hotel stay occurs. So that will be an expected lag of revenue from the time of booking.

Turning to slide 10. This shows that our head count increased by net 8 full-time employees this quarter from 417 to 425. We have added production employees to support the additional sales force and add employees to support our strategic initiatives around both marketing and product development. We continue to monitor the productivity of the sales force and believe they are on track to fully ramp up over the estimated 6 to 12 months that we have experienced in the past.

Moving to slide 11, we are maintaining solid collections in growing our cash balance. We ended the quarter with $65.1 million in cash and cash equivalents up from prior quarter as a result of our operating cash flow of $6.5 million.

Finally, turning to slide 12, in summary, we do have record revenues in both our segments and although our operating income continues to be impacted by our investments, we believe these investments will drive future growth. Lastly, we are maintaining our strong financial position with positive cash flow growing cash and no debt.

That concludes the financial summary of our first quarter of 2013 now Chris will provide an update on Travelzoo’s strategy to drive future growth.

Chris Loughlin

Thank you, Glen, and hello everyone.

As Glen highlighted we are very pleased with the quarter results, the testament to our outstanding team through robust business model that we have created and our focused investment strategy.

For those of you who are new to the Travelzoo story, the chart on the left of this slide outlines how our business grows. On the X-axis, you will see we are growing our audience and on the Y-axis, we are increasing our revenue per subscriber over time.

Our current investment strategy is focused on 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 not just by expanding our traditional email subscriber base, but increasingly we are adding Facebook fans, Twitter followers and download 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 hotel and mobile products to provide more utility and ease of use.

Let’s turn to the next slide to review how we are doing. Slide 15, highlights our progress against our sales force expansion plans. Last year, we set a goal of hiring 50 additional sales staff worldwide to drive future revenue growth.

On the left, you can see that we’ve made good progress through Q1 adding 29 sales staff net of attrition. We continued to ramp up to our goal of 171 sales staff but we will moderate our pace based upon our desire to achieve our short-term revenue goals also.

On the right, you can see how our investment in sales forces paying off over time. At the top, we show, we published significantly more deals in both North America and Europe. And at the bottom, you can see that our Getaways revenue grew 48% since last year. It takes approximately a year for our new staff to become fully productive, we’re pleased with our progress so far.

Moving to slide 16, we look at our next strategic element invest in audience growth. On the left, you can see that over time, audience growth has been a key driver of revenue growth for Travelzoo. To grow our audience, we invest in marketing. We began to modestly accelerate our investment in the second half of 2012 and we continued to opportunistically increase our spend levels compared to prior-year periods of spend.

In addition to our spending on subscribers, we’re also exploring new ways to grow and engaging our subscribers further. We saw our increased levels of engagement on a year-on-year basis and the quarter-on-quarter basis. We attribute this success to our increased focus and investment in analytics and engagement, growth in social media and app usage.

We’ve also improved the visual presentation of our products and we’ll continue to do so. We’ve only just begun these initiatives and we look forward to making more progress in the year ahead.

Slide 17 highlights our progress with mobile and social media. We made impressive progress in this area in the last 12 months. More than 1.6 million people have now downloaded our iPhone and Android apps. We’ve over 1 million combined Facebook and Twitter followers. During the quarter, we saw a significant jump in mobile purchases and visit some social media.

Turning to slide 19, sorry, let’s look at our third strategic element investing in product. Mobile traffic is already 35% of our entire traffic. We expect this to increase considerably in the future. Our brand and the contemporary offer travel, entertainment at local deal, the restaurants and spas and tourist companies is absolutely perfectly positioned for mobile consumption. We began to shift our development focus to mobile and expect to transform to a mobile first product development organization this year.

On the left, you can see one of the challenges we currently face in mobile. When we hand off to a hotel in this case, this particular hotel to their booking engine, it cannot be booked easily via mobile device. To solve this user journey and to provide easier search for our deals on mobile and web, we are developing a hotel booking platform. The platform will allow users to quickly and easily search for hotel at nights within travel used apps and on our website and making much easier for hotel siloed rates. For example, it will be easier for hotel to load a last minute rate for this weekend compared to our current solution.

Slide 20 lays out our timeline through 2013 to develop and roll out our hotel booking platform capability. This new product would take some time and investment and as Glen pointed out, we estimate additional investment in our booking engine of approximately $900,000 this quarter with no immediate revenue benefit.

In addition to the actual booking engine, we have to overhaul our hotel content and integrate with our existing payment and customer systems. We’ll be prudent and mindful of the need for change given that we already have a very profitable and robust model in place. We are already running early tests through the Perfect Escapes website that we purchased last quarter and these tests are helping us design our approach for the anticipated wider roll out of the hotel booking product.

Turning to slide 21, I want to remind everybody that quality underpins everything we do. Quality experiences (inaudible) and referral behavior making our brands thrive over the long run. Since the beginning 15 years ago, it’s always been about quality for us and it always be about quality in the future.

Concluding on slide 22, our areas of focus for 2013. First and foremost, we planned to maintain our quality leadership position by publishing high quality deals and tightening our brand control. We want to reaccelerate top-line revenue growth by investing in sales force and productivity, audience growth and engagement across email, social and mobile products to simplify and improve our business particularly for online booking capability and for mobile and lastly, we planned to invest for future growth while remaining profitable.

Thank you for joining us. This concludes our prepared remarks. Now, I’ll turn back to the operator for the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions)

Thank you. Our first question comes from Dan Kurnos of The Benchmark Company.

Dan Kurnos - The Benchmark Company

Yes good morning. You know, Chris you’ve seen some nice acceleration in the subscriber growth. I’m just curious maybe dig down a little bit more for us, what part of your marketing strategy or which channel is proving the most successful and besides changing mobile what’s not working or what would you do differently and do you expect sub growth will accelerate through the balance of the year?

Chris Loughlin

Hi, Dan, good morning. Well, we don’t necessarily disclose what’s working because other people copy us. But in general we are pleased with the results. We did spend more on subscriber marketing, so that one input that’s driving growth. But we are focused on optimizing the sign-up process. We are optimizing on our placements.

I also mentioned the marketed remarks that we did see a significant jump in traffic from mobile -- from social media. It was quite sizeable indeed. And I can’t say hand on we are crack the code on that yet. But we are very, very pleased with the amount of traffic we are able to bring in from social media.

On -- well, for the second half of your question was what’s not working? Well, we can always improve, right? I mean it’s not that we got a perfect chap. We have a team in place at a very, very smart who will continue to optimize and hopefully improve.

Dan Kurnos - The Benchmark Company

Would it be fair to say that with some of the scale you are seeing you are getting improving return on investment through the marketing channel?

Chris Loughlin

Well, return on investment is a metric that we measure internally. And what we see is, if we spend heavily, of course, return on investment drops because your balance of organic subscribers decreases and advertising drives more subscribers. So that is a balancing act to do on ROI around spend. But what is true is that, we seem to have come through the fog a lot more people now understand Travelzoo, understand the quality of the offering that we have, they may have tried us first time with a restaurant deal, and now they are trying us first time with the Getaway or travel deal. And that virtuous circle is clearly having a positive impact on the business and I think the best way you can view that is just look at the comments in social media for our brand compared to other brands we just -- we do a significantly better job for the people who use our service.

Dan Kurnos - The Benchmark Company

Shifting over to the Getaways portion it seems like competition has picked up from the OTAs and the airlines and sales and I’m just wondering have you seen any impact on the business for the addressable market, I mean you grown the business pretty nicely so far.

Chris Loughlin

I mean, its always competition out there and we continue to face competition, but we are owning our products now for example, a hotel can run a Getaway with us and we can provide them with reviews when people are checking out and that helps the hotel understand the quality of our audience and the experience we can show percentages of consumers who stayed and plan to return. We can also show demographic information. So our product is improving as the competition continues. So -- but our main competition has been part of our life from the beginning, so I would not say significantly different from the past.

Dan Kurnos - The Benchmark Company

We have also seen some recent signs of softening demand in Europe and the UK and particular in the e-commerce market. And I am wondering if you could share any thoughts as to whether you are seeing that going forward on the travel side?

Chris Loughlin

Well, in travel, I mean in the UK and Germany we saw a strong demand for our products particularly, from cruise operators and from vacation packages. We did enter the year with very optimistic news in general in travel, right. So I think a lot of these operators went as fast and hard as they could. There is sort of I think a general feeling in the UK in particular where people are fed up of bad news and a slowing economy and they are going ahead and booking the vacation Getaway anyway. In the U.S., the situation was a little different and we ended with very good news. Real estate prices are going up both business and consumers are feeling confident and we obviously were beneficiary of that.

Dan Kurnos - The Benchmark Company

And then, just lastly, on the daily deals fronts just a couple questions here. You seem to be getting modestly better traction with some of the larger cities but may be limited traction some of the secondary market, despite all of the headcount ramp. I am curious what you are long-term view of the daily deals market is and why it was that you saw customers buying fewer vouchers in this quarter?

Chris Loughlin

Well, actually overall, we sold more vouchers but when I say that it is a combination of the Getaways and the local deals. So we saw -- we had more purchases, we had more new purchases, we had more repeat purchases and we sold more vouchers in general. So that is an aggregate sense. We are -- we did send, we did increase the volume of Getaways that we sent, so one reason that could be the consumers are deciding that they do restaurant, or do they do a Getaway and not everyone will do both.

The second thing is that we are seeing in general fewer vouchers purchased per deal and yes that could be because we are a little further along now, two and a half years into the model, so some people like it. And the second thing we are seeing is a slight decrease in take rate on the restaurant and spa type deals.

Dan Kurnos - The Benchmark Company

Just a follow-up on that because that was the second half of my question. How much was the take rate impact in the quarter? If you can provide that, and was that directly related to Groupon cutting its take rate they did in Q4?

Chris Loughlin

I didn't hear that it was directly related to Groupon, but we're subject to competition and businesses now restaurants and spas now have this as part of their central marketing plan, right, so they -- this is now a staple for many of these businesses. And prices or rate changed or came down a little, it was as Groupon or Ida, I couldn't tell you. Sorry, what was the second half of your question?

Dan Kurnos - The Benchmark Company

Well, I was just curious how much the take rate was impacted in the quarter? And then, secondarily, how much of the decline in growth that you saw this quarter was reflecting the reduced take rate versus lower vouchers per deal?

Chris Loughlin

Yeah, I'm not sure we disclosed the full take rate but it came down. Glen slightly --

Glen Ceremony

Yeah, just Dan, that relatively speaking, I think the biggest impact is from a year-over-year perspective the bigger impact is less vouchers sold per deal. And like Chris said, we are pleased with overall we produced more deals compared to last year but that trend definitely impacted us. The take rate, I would think of it as, from a year-over-year perspective, it’s a couple of points. And we've been pretty selective. I would say its more – it’s less about overall competition and more about selective thinking about how we get the deals that we really want to have the quality in the portfolio that we'd like to see.

Operator

Thank you. Our next question comes from Ed Woo of Ascendiant Capital. You may begin.

Ed Woo - Ascendiant Capital

I had a housekeeping question. Did you say that next quarter you're going to see a $0.04 legal charge in addition to the $0.04 investment in your vacation packagers?

Glen Ceremony

Yes, Ed.

Ed Woo - Ascendiant Capital

And then the other question is, obviously, you had a very good first quarter. Was there anything specifically that changed in the market? I noticed you got a little bit more revenue from vacation packagers. Is that something that is some kind of a mental shift in your product focus?

Chris Loughlin

No, I don't think anything changed in the market per se. What we did do is we hired people through the course of last year. Some of those people are becoming productive now. For example, we have a chap in Manchester in the UK who did a fantastic job in the cruise area and brought a lot clients with him from his previous role. So those are things that we hope to see and we are seeing them. And obviously Getaways is up significantly and as I mentioned before to Dan, we did enter the year particularly in the U.S. with a great deal of confidence. So those vacation and cruise advertises cease the moment to get the forward bookings into the summer.

Ed Woo - Ascendiant Capital

Okay. And have you mentioned when you would have that hotel booking, you mentioned fully rolled out?

Chris Loughlin

No. We haven’t mentioned we will have it fully rolled out. We expect to be able to get the hotel booking engine live towards the back of the year and we have outlined it in the slide. I’m not sure which number the slide is. But, we are testing right now through our Perfect Escapes website to learn and understand the model and get the organization ready. And of course, it’s like a balancing act because we certainly don’t want to impact the great progress we are making with existing products such as Getaways.

Ed Woo - Ascendiant Capital

Great. Then my last question is on the Getaways, you mentioned that overall your take rate have come down a little bit, does that include the take rate for Getaways? And how was the pricing environment, you are going to raises prices for the listed email newsletters?

Chris Loughlin

Glen, would you like to answer the question?

Glen Ceremony

Sure, yeah. Just as a reminder, take rate since the beginning has been a bit lower on the Getaways, you know they are higher priced and it’s just a different sector. But as far as the decline, I would say there was a bit of decline less than in local deals.

Ed Woo - Ascendiant Capital

Great. And were you guys able to raise prices this year, I know you guys completed in the first quarter?

Chris Loughlin

On our core business –

Ed Woo - Ascendiant Capital

Yes.

Chris Loughlin

I would characterize it, as there weren’t any significant price increases.

Operator

Thank you. I will turn back now to Mr. Loughlin.

Chris Loughlin

Ladies and gentlemen, thank you for your time and your support, we look forward to speaking with you in the next quarter. Have a nice day. Thanks. Bye-bye.

Operator

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may now disconnect your lines at this time and have a pleasant day.

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