Good morning, everyone and welcome to the Travelzoo third 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 Executive Officer. Sir, you may begin.
Thank you, Operator. Good morning and thank you all for joining us today for Travelzoo's third quarter 2009 financial results conference call. I am Holger Bartel, Chief Executive Officer. With me today are Wayne Lee, the company’s Chief Financial Officer; and Chris Loughlin, Executive Vice President Europe.
Hello, everyone. Welcome to our conference call.
Good morning, everybody.
Before we begin, I would like to invite you to visit www.travelzoo.com/earnings where you will find the management presentation that we will discuss in the call today. We have changed the format of our call slightly versus previous calls and we will walk you through the presentation that you can find at this link. Again, it’s www.travelzoo.com/earnings.
Wayne will now walk you through today’s format.
Thank you, Holger. I would first like to remind you that all statements made during this conference call and presented in our slides 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.
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 archived recording of this conference call will be available on the Travelzoo investor relations website beginning approximately 90 minutes after the conclusion of this call.
For the format of today’s call, we will begin with a discussion of the company’s third quarter 2009 financial performance. In the second part, Holger will provide a brief overview of our growth strategy. We will then conclude with a question-and-answer session.
I will now turn to Holger for an overview of the company’s Q3 2009 financial performance.
Thank you. Today we announced Travelzoo's results for the third quarter of 2009. If you turn your attention to slide four of the presentation, here are the financial highlights. We revenue of $23.6 million. That’s an increase of 27% over the same period last year. Diluted income per share from continuing operations for Q3 2009 was $0.08. That’s up from $0.03 in the prior year period.
Subscribers to our publications in North America and Europe grew to 16.3 million. That’s up 1.1 million versus the end of Q2 2009, and it is up 24% versus Q3 2008. I would like to point out that all the numbers on these slides include our ongoing operations only -- that is our business segments in North America and Europe. So for example, Asia-Pacific revenues that were generated in Q3 2009 are not included in the $23.6 million number.
Let’s move to the next slide. With the pending sale of our Asia-Pacific assets, we are now treating the Asia-Pacific business segment as discontinued operations and the numbers that we discussed during the call today will focus on continuing operations. On slide 5, we actually provide you with the quarterly earnings from continuing operations, which include North America and Europe.
As we have seen in previous years, Q3 has traditionally been a seasonally more challenging quarter so we are actually quite pleased with the improvement that we have seen over the previous year.
I will now turn back to Wayne to discuss additional information on the following slides for our business segments in North America and Europe.
Thank you, Holger. Turning to slide 6, our year-over-year revenue growth accelerated in both North America and Europe during Q3 2009. Our North America business segment revenue in Q3 2009 was $18.9 million, an increase of 18% year over year. Our Europe business segment revenue in Q3 2009 was $4.8 million, an increase of 82% year over year. In local currency terms, revenue increased 110% year over year.
I would like to add that revenues, costs, and income from fly.com, our new meta search engine, are reported within the results of their respective business segments of North America and Europe.
In terms of revenue concentration, Travelzoo did not have any group of advertisers under common control that accounted for 10% or more of revenue in Q3 2009.
Turning to the next slide, we were able to increase our operating income from continuing operations from $2 million in Q3 2008 -- I’m sorry, $2 million in Q3 2008 to $2.3 million in Q3 2009, in spite of a $1.3 million increase in spending on subscriber acquisition, and $1.6 million of increased expenses related to the launch of fly.com.
North America operating profit for Q3 2009 was $3.6 million, down from $4.2 million for the same period last year. And our Europe business segment incurred an operating loss of $1.3 million in Q3 2009, an improvement over operating losses of $2.2 million in Q2 2008.
Turning to slide 8, Travelzoo's net income from continuing operations in Q3 2009 was $1.3 million, up from Q3 2008 net income of $514,000. The company recorded $1.3 million of income tax expense on the income from our operations in the U.S. The $1.3 million operating loss from our Europe business segment was treated as having no recognizable tax benefit and as a result, our effective income tax rate was 50%.
Moving on to the next slide, on the cash management front, our DSO, that’s days sales outstanding, as of September 30, 2009 was 48 days, down from 49 days as of June 30, 2009. And our total cash and cash equivalents as of September 30, 2009 was $15.7 million, up from $15.5 million as of June 30, 2009.
Slide 10 shows that Travelzoo had 185 employees from continuing operations as of September 30, 2009. This is up from 156 employees as of September 30, 2008 and up from 174 employees as of June 30, 2009.
Average annualized revenue per employee in Q3 2009 was $510,000, up from $477,000 in the same period last year.
Let’s now look at the expense line items of our two business segments, beginning with North America on slide 11.
For our North America business segment, which consists of our operations in the U.S. and Canada, total sales and marketing expense in Q3 2009 was $9.2 million, or 49% of revenue, up from $7.3 million or 46% of revenue in Q3 2008. General and administrative expense increased to $4.7 million in Q3 2009 from $3.8 million in Q3 2008, and as a percentage of revenue increased slightly to 25% from 24%.
The increase in operating expense from Q3 2008 was primarily due to a $600,000 increase on subscriber acquisition, a $1 million increase in operating expenses from the launch of fly.com, and an $800,000 increase in marketing for Super Search.
Our next slide shows that in Europe, total operating expenses as a percentage of revenue decreased from 183% in Q3 2008 to 125% in Q3 2009 in spite of an $800,000 increase in spending on subscriber acquisition and a $400,000 increase in salary expense, due to increased headcount in sales and our production team.
Turning to the next slide, slide 13, during the third quarter we accelerated our subscriber acquisition as we see our audience growth as an investment into future revenue and profits. During the quarter, we added a total of $1.6 million new subscribers to our email publications in North America and Europe.
Net growth in subscribers during the quarter was $1.1 million, and we ended the quarter with $16.3 million subscribers.
The next slide shows how the combination of improved execution and lower media prices has helped drive down our acquisition costs compared to the prior year. In North America, although our subscriber acquisition expense increased by 44% year over year, we added 199% more subscribers in Q3 2009 compared to Q3 2008, as the average cost per subscriber decreased by 52% from $3.73 to $1.80.
In North America, Travelzoo's top 20 newsletter and news flash email alert service had a net unduplicated total of 13 million subscribers as of September 30, 2009. This represents an increase of 17% versus the same time last year.
In Europe, we increased our subscriber acquisition spending by 67% year over year but were able to add 114% more subscribers during the quarter, as our average cost per subscriber decreased by 22% from $4.52 in Q3 2008 to $3.53 in Q3 2009.
In Europe, Travelzoo's top 20 newsletter and news flash email alert service had a net unduplicated total of 3.3 million subscribers as of September 30, 2009, an increase of 55% versus the same time last year.
The costs of our subscriber acquisition in North America and Europe are expensed as incurred.
This concludes the first part of our presentation. We will now turn back to Holger for a brief overview of our growth strategy.
Thanks, Wayne. So we are now moving to slide 16, and as I’ve explained in the past, there are really three elements to our growth strategy. First, we believe that multiplying the Travelzoo business in attractive international markets is a great opportunity for us. We are looking to build Travelzoo into a global brand and we think there are opportunities to provide global content to Travelzoo fans around the world.
Second, we are expanding the scope of our Travelzoo business into the area of entertainment. What is that? That includes, for example, deals on Broadway shows or deals and discounts on local sports events.
Third, we launched fly.com at the beginning of the year and we believe that meta search is a great opportunity for us that offers attractive economics as well as great synergies with the Travelzoo business.
Let’s look at the international expansion and turn the clock back to 2005. On slide 17, when you look at where we were at the end of 2005, we primarily operated in the U.S. we had 9.4 million subscribers in the U.S. and we just launched operations in the U.K.
The next slide, number 18, will show you what has happened over the next three years. As you can see, we continue to grow our audience in the U.S. modestly from 9.4 million to 10.4 million, but we launched in Canada, we invested aggressively in Europe, where we launched also in Germany, in France, and in Spain, and we began operations in Japan, China, and Australia.
Slide 19 shows where we are today -- just three quarters after the previous slide. As you will notice, the U.S. now shows over 12 million subscribers. That’s quite an increase compared to the 9.4 million to 10.4 million change that we saw in the previous three years, so we really have begun accelerating subscriber acquisition in North America. We continued our aggressive expansion in Europe. We are now in the U.K., Germany, and France and Spain. We reach over three million subscribers combined, and we also continued our expansion in Asia-Pacific.
But what does that mean for our earnings, and for EPS? On slide 20, we thought we would provide you some more insights into how this affects our earnings. On the left hand side of this slide, we show you operating income from operations excluding subscriber acquisition. North America, Europe, as well as interest and foreign exchange gains, add up to $0.39 per share.
In the middle, we show you what the subscriber acquisition expenses are. They were $0.12 in North America per share and in Europe, $0.11. This takes us to $0.16 operating income before taxes. Taking off now taxes of $0.08 and the loss from discontinued operations, which is our business segment in Asia-Pacific, we finally arrive at an EPS net loss per share of $0.02.
On slide 21, we provide you how this has evolved over time, particularly over the last year. The first row here shows you operating income excluding subscriber acquisition expense and the second one breaks out what the subscriber acquisition expense is. As you see, we have really increased subscriber acquisition over the past four or five quarters. In fact, with $0.23 per share, we had the highest investment into subscriber acquisition this quarter for a long time. The third row shows you operating income. We then add currency gains and interest income, deduct income taxes, and on the bottom row you see the income from continuing operations net of tax. In Q3 2009, the income from continuing operations after tax was $0.08 per share, which compares to the $0.03 per share in Q3 2008.
Let’s look at this a little bit more in detail and I’ve asked Chris to provide a bit more insight into Europe and take the U.K. as an example and show us how subscribers and revenue growth affect profitability over time.
Thank you, Holger. So like any publisher, our success is predicated on the size and influence of our audience and in the U.K., it took us three to four years to build a large, high quality audience. To put our size in the U.K. into perspective, you should know that the U.K. has an adult population of approximately 30 million. We now reach 1.5 million subscribers every week. As soon as we reached the 1 million U.K. subscriber every week, just over 3% of U.K. adults, we started to see an inflection point in the revenue growth. From the end of 2008, revenues in local currency terms grew faster than costs and we now see that we’ve moved to profitability in 2009.
If you now move to slide 23, we can see that the pattern is common across all of the markets, where revenue is now growing faster than costs. On this chart you see on the left side, the markets where we have been operating for a while and as you move further to the right, you see Spain and France, countries where we started operating more recently. Both the U.K. and Canada have now moved to profitability. In Germany and France, we see revenues growing much faster than costs but these businesses are of course younger and the audiences are still growing rapidly to that inflection point that we saw in the other two markets.
Back to you, Holger.
I would like to conclude this presentation with talking about what our focus is in Q4 and for next year. We have several items here that I listed on slide 24. First, we are looking to close the sale of our Asia-Pacific assets. As I pointed out earlier, this will likely occur on October 31st, and I’d like to remind that we are keeping an option to purchase back the Asia-Pacific business in the future.
Second, Europe will continue to be a key focus of our investment activities. We believe the opportunity in Europe is very strong, so we will continue to invest and grow the audience, which we hope will result in increasing revenues and will help us move closer into positive income and contribution.
Third, you have seen that we invested quite a bit this year into growing the North America audience. In 2010, our focus will be on monetizing this larger audience much better.
Fourth, we are looking to more aggressively sell the global audience. This means, for example, that we would go to a hotel in Paris and sell them to run a promotion in North America or in Asia-Pacific. It also means that we will produce more attractive global content for our subscribers.
Next, we will continue our expansion into the area of entertainment offers and last but certainly not least, we are looking to grow the fly.com audience and revenues in 2010. This is one of our focus areas as well.
Travelzoo's consistent practice has been not to provide guidance for future periods because of the dynamics of the industry. Therefore, this will conclude our prepared discussion and I will turn the call back to the operator now for the question-and-answer session.
(Operator Instructions) Our first question comes from Ed Woo of Wedbush.
Edward Woo - Wedbush Morgan Securities
I have two questions, one of which is have you decided what you are going to do with the cash from the Asia business? I think that’s about $3.6 million. And the second question I have is can you give us any updates on how fly.com is doing? If you can’t give specifics, maybe just qualitatively? Thank you.
Wayne will address the first question and then I will talk a little bit more about fly.com.
Although we don’t have specific plans for the cash from the pending sale of the Asia-Pacific business, this does give us the opportunity should we choose in the future to increase our subscriber acquisition spending or increase our spending on trying to grow the fly.com business.
So with regard to fly.com, it’s still a relatively new business. Keep in mind we just launched it eight months ago and as you have seen through the presentation, we have really started quite a number of businesses over the last four to five years if you consider each operation in these international markets as a new business that we start. And there is always an investment phase, so it’s not that different with fly.com.
As I pointed out earlier, fly.com added over $1.5 million in additional expenses to our P&L in Q3 2009. However, what is really different and what is unique with fly.com is that we can leverage the Travelzoo audience that we have already built to drive traffic to the fly.com site and to promote the brand. This is a strategy that we have actually been employing and that is working very well for us so far. So while we actually reduce marketing spend on fly.com from Q2 to Q3, we still had over 4 million visitors to the site during Q3.
Edward Woo - Wedbush Morgan Securities
We will take our next question from Melinda Davies with Susquehanna.
Melinda Davies - Susquehanna Investments
I have a follow-up question to Ed’s on fly.com -- I’m wondering what are the biggest investments you are making there? Is it more keyword advertising? You did say that you are leveraging your user base already but I’m wondering, keyword advertising versus servers or other kind of technology investments, if you could help us understand that. Thanks.
It’s really across the board. You have of course -- yes, of course expenses related to just the technology to operate it, to dive for data sources. Yes, expenses for marketing and yes, expenses for the staff that you need to build up in order to operate the business.
So I would say you really have areas that really the areas, all three areas are somewhat -- have somewhat been equal in Q3, so the expenses really come from all these areas. Over time, we believe that we will invest more on the marketing side and of course, our staff will grow so these expenses will go up. On the technology side, a lot of the development has already occurred and the development we did in 2008, we actually activated it and are depreciating it over time. So I think this gives you a relatively good insight on where the costs come from related to the fly.com business.
We will take our next question from John Lewis of [Ozmyam] Partners.
John Lewis - Ozmyam Partners
When I look at North American EBIT per subscriber, I think in ’06 you were at 307; ’07, 260; for ’08, 187; and 2009, 108, and your presentation was very helpful explaining the investments you are making in the business. But kind of looking out, I mean, that’s quite a drop and for understandable reasons but do you -- is there a feel that this is kind of a trough in EBIT per North American subscriber? That’s my first question.
John, it’s really related to all the factors we have pointed out throughout the presentation, that the investments we are making in North America have been quite substantial this year. One thing that is very important to understand is that revenues don’t immediately come at the same time when you grow the audience. In the past, we have seen that there is typically a time lag of 12 to 18 months between investing into subscriber growth and really seeing the benefits in terms of higher revenues, which then help us increase profits.
So I think this is something you really have to take into consideration when you analyze revenues per subscriber that in phases when we invest more into subscribers and grow the audience, revenues will not grow immediately at the same time but we hope that will change then in the future.
John Lewis - Ozmyam Partners
That’s helpful. My next question is -- I think when you look at the total population of a country versus your subscriber base, I think you are around 4% for North America and I think you are just over 3% in the U.K., and it looks like the customer acquisition costs are extremely compelling. I think your customer acquisition cost is down 15% to 180, so I guess it’s a question of how big in terms of percent of a population, is there any way to feel where you could get to in terms of market penetration?
Chris, would you comment on that, please?
When we started these businesses in Europe, my feeling was always if we got 1% of adults, we would probably have a little bit of power in the market and that was true. At what point does it start diminishing? I really don’t know but I think it’s quite far away. There are certainly companies in the world who have large audiences. I mean, The Sun newspaper in the U.K. reaches 5 million readers every day, so could we get to 5 million readers every week? I don’t see that that would be a problem. I can't sort of put my finger in the air and say where it ends or where it caps but I think it’s quite far off.
John Lewis - Ozmyam Partners
That’s helpful. Last quick point is we were struggling trying to figure out how big fly could be and we were looking at -- I think you guys referenced your ability to market and to the current Travelzoo installed base, and we came across an ad I think a director of marketing said that you guys were looking for maybe as much as 20 million to 30 million in 2010 and we were trying to just look at revenue per subscriber -- can you give any comments on that?
John, of course it’s relatively difficult to predict the future and I would be the last person on here to predict what our revenue for fly.com will be next year or in the following years. I wouldn’t derive too much from advertisement for getting staff on board. Of course, we want to make this look very positive and get people excited about the opportunity but we will really know only at the end of 2010 what the revenues in 2010 will be.
As I’ve pointed out, the strategy of leveraging a Travelzoo audience has worked very well so far and to some extent, the level of investments we will make in 2010 depends on the success of the business and that will drive the investment level -- if the business evolves very successfully, we will invest more.
So it’s really very hard to predict the future there. It’s simply too early.
John Lewis - Ozmyam Partners
Great. Thank you very much, excellent presentation.
And that does conclude today’s question-and-answer session. I will turn the conference back to Mr. Bartel.
Thank you very much again for participating. Thank you for your support. We look forward to speaking with you again next quarter and have a nice day. Bye-bye.
Thank you, ladies and gentlemen. This concludes today’s teleconference. You may disconnect your lines at this time and have a nice day.
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