Travelzoo Inc (TZOO) CEO Discusses Q2 2013 Results - Earnings Call Transcript

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 |  About: Travelzoo Inc (TZOO)
by: SA Transcripts

Operator

Good morning everyone and welcome to the Travelzoo Second 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.

Christopher Loughlin

Thank you operator. Good morning and thank you for joining us today for Travelzoo’s second quarter 2013 financial results conference call. I am Chris Loughlin, Chief Executive Officer, and 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 then good morning everyone. Thank you for joining us. Before we begin our presentation, we’d 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.

Unless required by law, we undertake no obligation to update publicly any forward-looking statements whether as a result of new information, future events, or otherwise.

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 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.

For today’s format, I will review our second 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. We achieved revenue of $41.3 million this quarter, representing 5% year-over-year growth. Our earnings per share this quarter was $0.34, which is lower than prior year’s due to our investments in sales force expansion, marketing and our hotel booking platform. In addition, we saw a growth in new subscribers.

Slide 4, highlights our revenue by segment. Revenue in North America was $30.2 million representing a year-over-year growth of 5%. In Europe, revenue was $11.1 million, representing year-over-year growth of 4%. Local currency Europe revenue growth was 7%.

On slide 5, the North America year-over-year revenue increase of $1.5 million was driven by the increase in our travel revenue due to increased spend by certain vacation packagers and cruisers, as well as continued growth in our Getaway voucher offering for hotels. This was offset a by decline in local revenue from reduced number of vouchers sold per deal compared to the prior year period.

On slide 6, the Europe year-over-year revenue increase of $500,000 was due primarily to our travel revenue driven by increased spend by certain vacation packagers, cruisers and Getaways for hotels. This growth was offset by some decrease in our search revenue driven by reduced spending.

Slide 7, provides some detail on our operating income and net income. We generated $7.8 million in overall operating income of which $1.9 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 development of our hotel booking platform, all have lowered our current operating income. However, we believe these are sound investments for future growth. In addition, our tax rate increased compared to prior year, as we are now providing for taxes on our European income.

Slide 8 shows the cost of revenue and operating margin. The cost of revenue as a percentage of revenue increased due to certain customer service investments we are making in advance for hotel booking platform, as well as increased deal syndication expenses from the increase in the relative volume of syndicated deals. Our operating margin was impacted year-over-year by our continued investments.

Slide 9 captures our operating expenses. Our North America operating expenses increased year-over-year by $3.1 million primarily due to a $2.3 million increase from our headcount related investments and another $800,000 primarily due to the incremental search marketing costs. Europe operating expenses increased due to our investment as well.

We did not significantly increase our spent on subscriber marketing because we were balancing these need with the need to invest in other areas. We expect increased operating expenses next quarter from the continued ramp-up of headcount costs, increased marketing, legal and professional fees, and increasing development costs for our hotel booking platform.

Turning to slide 10, this shows that our headcount increased by a net 19 full time employees this quarter from 425 to 444. We have continued to add sales force for hotels and local deals. In addition, we have added production employees to support the higher volume and have added employees to support our strategic initiatives in both marketing and product development.

We continue to closely monitor the productivity of the sales force and believe these additions are helping to support our strategic initiatives.

Moving to slide 11, we are maintaining solid collections and growing our cash balance. We ended the quarter with $73.4 million in cash and cash equivalents up from prior quarter as a result of our operating cash flow of $10 million.

Turning to slide 12, in summary, we delivered solid revenues this quarter and increasing profitability year-over-year in both of our segments. And although our operating income continues to be impacted by our investments, we do believe these investments will drive future growth.

We are also maintaining our strong financial position with positive cash flow, growing cash and no debt. As a reminder, the second half of our fiscal year, which we are now entering has historically been seasonally slower. Looking forward to this next quarter, our third quarter of our fiscal year, we expect the following.

For revenues, we expect sequential declines in our local revenue similar to last year’s third quarter due to seasonality. We also expect our travel business to be at relatively similar year-over-year growth rates at this last quarter Q2 2013.

For expenses, we expect the following; cost of revenues are expected to increase approximately 50 basis points compared to Q2 2013 due to increasingly syndicated deals and seasonally lower revenue.

For sales and marketing, we expect a sequential increase compared to Q2 2013 of approximately $500,000 given our goals to invest in our audience. This is less than half the sequential increase than we experienced last year. For our hotel booking platform investment, we expect a sequential increase in expense compared to Q2 2013 of approximately $300,000.

And lastly for various reasons, we did not end up incurring the full previously expected increased legal and professional expenses that were estimated at $0.04 of EPS in this quarter Q2 2013, yet, we currently expect to incur these expenses by the end of the year.

Again, we ended the first half of the year with solid results and remain confident that even with our historically slower second half, we are in a good position to continue to invest in our future.

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

Christopher Loughlin

Thank you, Glen and hello everyone. For those who are new to the Travelzoo’s story, the chart on the left, on slide 14, outline how our business grows. On the x axis, you can see we’re growing our audience. On the y axis, we’re increasing the revenue per subscriber over time.

Our current investment strategy falls into two areas; first, we’re investing in audience growth, not just by expanding our traditional e-mail subscriber base, but increasingly we’re adding Facebook fans, Twitter followers, and download to our iPhone and Android apps.

And second, we’re investing in product development. We’re focused on improving our engagement in convergent levels through better visual presentations and simplify the ease of use. We’re also expanding our product portfolio to include full products such as the hotel booking platform.

Let's turn to the next slide to review how we're doing. On slide 15, you can see that over time, audience growth has been a key driver of revenue growth. So far this year, we've welcomed 1.5 million net new subscribers and while we’re pleased with that progress, we invested less in marketing than we would have liked as we balanced this need with our need to invest in sales force ramp-up, search marketing and new product development.

In addition to growing the absolute number of subscribers, yes, we’re very focused on further engaging our existing subscribers. This quarter, more subscribers engaged with our brand than in any prior quarter. We also saw more returning subscribers buying our local deals and getaways than in any prior quarter. These improvements in audience engagements stem from better targeting through customer segmentation, better visual presentation, improved photography, improved service levels and the expansion of our brand across social and mobile. The continued high-quality nature of the deals we publish also remained the key driver of audience engagement.

Slide 16 highlights our progress with mobile and social, where we continue to make impressive progress. Approximately 2 million people have now downloaded our iPhone and Android apps and we ended the quarter with approximately 1.5 million combined Facebook fans and Twitter followers. During the quarter, we saw a record number of visits in social media or ranked one of the most visited travel brands on Facebook.

Turning to slide 17, let's look at our second strategic element, investing in product development. The dominant trend in our industries travel, entertainment and local is that, users are engaging increasingly via mobile. In the second quarter, our mobile visits were 40% of Travelzoo traffic, up five points from the prior quarter. While our content is perfectly suited for mobile, our data structures and booking capabilities are limiting our ability to service our subscribers, as well in ways we would like.

For example, if a subscriber came and pulled up our mobile app to find a hotel deal this weekend in New York, which undoubtedly we have, it could take several minutes to find the deal and several more minutes to book the hotel on the hotel’s website.

For every booking, the subscriber would have to reenter his details. This limitation stems from the fact that we were designed as an e-mail publisher. With the advent of mobile we see greater urgency to fix these usability challenges.

To solve this problem, we’re developing a hotel booking platform, and the platform will allow users to quickly and easily book hotel nights within Travelzoo’s websites and mobile products, and make it easy for hotels to load rates.

Turning to slide 18, the introduction of hotel booking platform highlights the evolution of our brand. Travelzoo started 15 years ago as the pioneer of big travel deal alerts, e-mailing our subscribers when we learn to the great deal. Because e-mail was our primary form of communication, we didn’t focus on the product development of our websites and mobile products indeed we saw these as repositories for our push deals.

Today, Travelzoo’s websites and mobile products attract millions of subscribers each month, who come directly to us to book travel, because they trust us. We need to evolve these products to better service our subscribers.

The chart on the right of this slide shows how our local deals business is already benefitting from this pull behavior, where 21% of our local dealers revenue in Q2 was a direct result of subscribers simply coming to our websites and pulling up on mobile apps. They didn’t wait for an e-mail to be pushed then.

Slide 19 lays out our timeline for the development and rollout of our hotel booking platform capability. The new product will take some time in investment and we estimate our investment in the platform will be approximately $1.2 million this quarter with no immediate revenue benefits. This is an incremental $300,000 compared to last quarter as Glen pointed out in his highlights.

In addition to the actual booking engine, we’ll have to overhaul our content and integrate with our existing systems. We will be prudent and balanced with a need to change, with the fact that we have a very profitable and robust model in place already.

We’ve made good progress this quarter, including continued testing on the Perfect Escapes Website and contracting hotels, we’ve also been preparing our customer service capabilities.

Turning to slide 20, I want to remind you that quality underpins everything that we do. Quality experiences drive, repeat and referral behavior, making our brands thrive at the long run. Since the beginning, for us it’s been about quality and it will be into the future.

Concluding on 21, our areas of focus for 2013 are; first and foremost, we plan to maintain our quality leadership position and publishing high quality deals and finding our brand control. We want to re-accelerate top line long-term revenues by investing in audience growth and engagement across e-mail, social and mobile, products to simplify and improve our business, particularly online booking, capability for hotels and our mobile products. And lastly, we plan to invest in the 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) Our first question comes from the line of Ed Woo. Your line is open and you may proceed.

Edward Moon Woo – Ascendiant Capital

Yeah, thank you. Glen, I had a question. You went through some of the numbers on the expenses really quickly. Can you go over that really quickly, I want to…

Glen Ceremony

You want me to recap that, Ed.

Edward Moon Woo – Ascendiant Capital

Yeah, yeah.

Glen Ceremony

Okay, great, great, yeah. So for the expenses on the cost of revenue, and when we describe the flux this quarter, those went up a bit as a percentage of revenue. So, we’d expect 50 basis points increase compared to Q2 due to just increasing mix of the syndicated deals. So part of our marketing effort is to use our network and syndicate deals and that comes with a bit of cost to doing that and we don’t have any incremental selling cost. So we have to pay some cost to that network to distribute those deals. So, that’ll be a part of the cost of revenue this coming quarter as well and then just for that fixed component of (inaudible) component of the cost of revenue, seasonally we have lower revenue, so the percentage goes up a bit.

On the sales and marketing, we’re expecting an increase compared to this last quarter of about $500,000 because our goal is to invest in our audience and I don’t think we held back this last quarter a bit and just because we had a lot of things going on, other investments and potential increase in other costs and we’re trying to balance that with our profitability goal. So we feel like we need to catch up a bit on the subscriber spend in particular and that increase, when you look at it is less than the sequential increase that we had last year, Q2 to Q3.

And then as the final highlight, that was the hotel booking, we’ve got another $3,000 incremental this quarter Q3 compared to Q2 that we were expecting. And then as the highlight from what we said last quarter was that we were expecting some increased legal and professional fees and it was approximately an impact of $0.04 on EPS and we expected to fully come to fruition and most of that didn't happen this quarter. We are still expecting it, but what I can say is, we will probably incur that before this year wraps up. Did that help, Ed?

Edward Moon Woo – Ascendiant Capital

Yeah, thank you. It sounds very, very clear, thank you for the details. Then I had a question, it looks like your local deals were up quarter-over-quarter overall, but down a little bit year-over-year. Do you think that that's going to be a trend that's going to continue and also it looks like your take rates has gone down little bit noticeably down and do you think it has anything to do with the competition?

Glen Ceremony

Yes, couple of things. Chris, do you want to pick this one or you want me to go ahead.

Christopher Loughlin

No, no, go ahead, absolutely go ahead.

Glen Ceremony

Yeah, couple of things on that. One trend that we have mentioned before is that the trend year-over-year is definitely been we’re selling less vouchers per deal, so that trend is definitely impacting us year-over-year. I mean we are definitely pleased with the sequential increase and the production of the deal.

So we’ve got more deals coming out and we feel really good about the quality of the deals. The take rate that you are seeing year-over-year, it has, like I had mentioned last quarter, has come down a couple of points, that's a combination of things. One, just selective lowering for the deals that we want, quality deals, so call that competition, call that we want to make sure we’re getting the quality deals in the mix. But the other part of it is, the thing Chris was mentioning was this, these extended period deals that are on our side has somewhat a dim impact on that as well.

Christopher Loughlin

Yeah and there is quite a few deals that we didn’t e-mail out, I mean the one thing you have to do in the mobile world is you just have to have good coverage. So we have many deals that just are not necessary to e-mail, but they are very useful in the mobile environment.

Edward Moon Woo – Ascendiant Capital

Do you anticipate there would be possibly a change in strategy a little bit in terms of having more deals that aren’t specifically pushed out for your subscribers, having more of a kind of hit deal gains carry over from the goal and how do we look for or do you think that you want to go and you need to focus on the e-mail marketing?

Christopher Loughlin

I think in the future or even now, we are certainly seeing Travelzoo becoming an established trusted brand. I think that’s the sort of the underlying ingredient and we are seeing millions of people come to our website who are just looking to do things or bringing up perhaps never could do things, they are not waiting for the e-mail to come and the business in general is becoming a push-pull. Whereas I think when you first start covering us we were a company that primarily sends e-mails. So yes, we will have more deals available all at a time, not just in local deals, but also in hotels. We will make that deals more searchable.

If you actually go to the, what we call the category levels or the city level, you can see now you can search by spa, restaurant, and so forth. We’re trying to make the experience much easier for the subscriber and we will start to push those usability improvements into mobile as well.

Edward Moon Woo – Ascendiant Capital

Great. And the last question I have is how is the overall travel market and how much of that has (inaudible) core travel business into strong in this quarter?

Christopher Loughlin

I mean, overall, the market is quite strong and I think it’s quite a confidence when I am speaking with hotels or airlines. They were talking about the next 18 months and things are certainly picking up. In Europe, the story is a little different. The economy continues to drag, although the northern is – so the Northern Europeans are consuming the beds in the southern countries and that’s helping the tourism industry.

But the audience side, on the audience side in the southern countries, it’s not robust at all. So that’s what’s happening and I think everyone is quietly confident but I wouldn’t say that we’re – I would say, it’s rather quite confidence than the high-fives at this point.

Edward Moon Woo – Ascendiant Capital

All right, well, thank you and good luck.

Christopher Loughlin

Thanks, Ed.

Operator

Thank you. Our next question comes from the line of Dan Kurnos from The Benchmark Company. Your line is open and you may proceed.

Dan L. Kurnos – The Benchmark Co. LLC

Yeah, good morning guys. I just wanted to get a little bit more into the subscriber side first, I think you have made it pretty clear now that you are a little bit disappointed with the subscriber growth, but you are balancing your expenses for profitability and you’ve talked about reaccelerating that growth although to less of an extent that you self witnessed last year sequentially. So my question to you is, are you seeing marketing efficiencies, most of the OTA space right now is being forced into more premium pay channels and we’re seeing negative efficiencies and marketing spend. So, are you guys seeing something different or are you pushing different channels that you think can still ramp growth without having to spend too extensively?

Christopher Loughlin

Hi, Dan. We think we’ve got quite a lot of headwinds with an intentional pullback on our part. This company likes to remain profitable and we just pulled back a little bit on the marketing. Honestly, we were on the marketing team side, we were focused on the social and also the engagement levels. We’re pretty delighted with engagement levels across the board in every country actually and we’re very, very pleased with our presence in social media. I mean, we’ve already come from nowhere to being one of the leading brands in social media and travel in the last 18 months. So, I think we’ve got a lot of headwind to spend to get e-mail subscribers, but the world is changing with the great job in social and we’re doing a pretty good job in mobile and you are going to see a balanced approach across those three platforms going forward.

Dan L. Kurnos – The Benchmark Co. LLC

Got it, great. And then, turning to the travel side of the business, maybe just quickly to touch a little bit more, or talk a little bit more into Ed’s question. Yeah, we did see last night that eBay had noticed some moderating e-commerce growth rates actually in the UK and Germany and your international, your European travel growth was a little bit lower than we were expecting, but overall we haven’t seen any declines in the travel side from a macro perspective internationally within Europe yet. Do you see that filtering through into the back half of the year? Are you still going with the – we’re still cautiously optimistic.

Christopher Loughlin

I mean, like we’re in four markets in France and Spain, it’s certainly challenging, it’s more on the audience side and we are publishing deals at hotels in those countries and other markets and still seeing a stronger response, so I am not optimistic on the outcomes there.

In Germany, we’re in quite an interesting position. It’s not as competitive now in Germany as it was in the daily deal boom. A lot of those businesses have gone. We have a very strong team there. So I would say I am cautiously optimistic there. In the UK, I will remain cautiously optimistic although perhaps less optimistic than Germany because the competitive environment is very, very intense. So hopefully that gives you sort of the flavor on how we feel about it.

Dan L. Kurnos – The Benchmark Co. LLC

Yeah, that's very helpful. And then I noticed in the presentation that you guys didn't breakout getaways growth this quarter. Do you have that number?

Christopher Loughlin

I don’t think we have broken that out, oh yes, we did break that out last quarter, Glen do you have?

Glen Ceremony

We did, I mean, it was approximately 30% overall.

Dan L. Kurnos – The Benchmark Co. LLC

Great, thanks. And then Chris, you did mentioned that you and I’ve talked about this a lot, we’ve and with regards to the website, I did notice some of the minor changes we have seen on the daily deal side with breaking out by category, I think that’s a good improvement. Could you give us a sense of the timeframe for when we might see a bigger overhaul or what your thinking is about that revamping the website?

Christopher Loughlin

Yeah, I mean just to the products in general. I mean, first off, I’d encourage you to look at the new Fly.com website. We did finish that overhaul. It looks fantastic. And also you can see the mobile app – it’s not the mobile app, certainly the mobile website for Fly.com, that got launched this quarter, it looks pretty great. And more importantly, it functions well.

On the Travelzoo side, the biggest undertaking was moving to these 2x1 image format and that’s now done. You see below the homepage that the whole site is pretty much done already. The homepage is the remaining piece of the puzzle and we are working on the homepage. You may not know it, but the homepage is localized for your city and has been for sometime. So in addition to visual changes, there were technical changes that have improved the experience and these things are leading to higher engagement levels. Obviously if a guy coming to the homepage is sitting in San Francisco, he sees deals that are related to San Francisco, he is more likely to be engaged in seeing nationalized deals. And so those went live, I would sincerely hope that we get the new homepage live this quarter. But it’s really just a case of – you don’t want to make the change unless it’s perfect and we are quite picky as you know. So once it’s ready to go, we will get it out, but we’re not going to put a date on that. We just want it to be really good.

Dan L. Kurnos – The Benchmark Co. LLC

Got it, great, thanks. And just maybe two quick questions for Glen on the expense side. I know that you called out the legal expense, I am assuming that’s why G&A had some efficiencies, there you actually had some leverage in G&A year-over-year, which is a little bit surprising and you guys had the headcount ramp, so would it be fair to assume that either the legal expense plus the headcount ramp should take up G&A going forward and how should we think about just the timing of that legal expense over the balance of the year?

Glen Ceremony

Yeah, I mean, I would be honest with the timing, we are bit off on that a lot because we are expecting it this last quarter. So I can’t really say much on the timing. Besides my expectation right now is before the year-end, we’ll incur most of that expense today that I talked about.

But on your question on the, what G&A does? Yeah, I think it goes up from this last quarter, as some of that is just from the hotel booking platform investment, but some of that is just naturally. If you look at last year’s Q2 to Q3, we just had naturally have some consulting and audit tax and compliance work happening in the second half of the year, that doesn’t happen in the first half, and so we have to take the expense in those periods. So, you’ll see a pickup of both.

Dan L. Kurnos – The Benchmark Co. LLC

Okay, and then just the second part of the question, just it maybe dug a little bit deeper into the net headcount add. Just curious if you would be willing to sort of breakout how much of the net adds were hotel platform versus deals versus just generic travel?

Glen Ceremony

Yeah, I would say they’re – it’s probably over half of it. It is the sales force and the hotel and link local deals and then the remainder I would say, I think about half of that is hotels.

Dan L. Kurnos – The Benchmark Co. LLC

Got it. Great, thank you both very much.

Glen Ceremony

Thanks Dan.

Christopher Loughlin

Great, thanks Dan.

Operator

Okay. I’ll turn back now to Mr. Loughlin.

Christopher Loughlin

Thank you operator. Ladies and gentlemen thank you very much for your time and we wish you a very good day.

Glen Ceremony

Good bye.

Operator

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

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