Travelzoo's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.17.13 | About: Travelzoo Inc (TZOO)

Travelzoo Inc. (NASDAQ:TZOO)

Q3 2013 Results Earnings Conference Call

October 17, 2013 11:00 AM ET

Executives

Chris Loughlin - Chief Executive Officer

Glen Ceremony - Chief Financial Officer

Analysts

Dan Kurnos - The Benchmark Company

Operator

Good morning, everyone. And welcome to the Travelzoo Third 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 third 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’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 the format of today’s call, I will review our third quarter financial results and then Chris will provide an update on our strategy. Thereafter, we will open the call for 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 $37.3 million this quarter representing 5% year-over-year growth. Our non-GAAP earnings per share this quarter was $0.19, which is lower than prior year’s earnings per share due primarily to our investments in sales force and development of our hotel booking platform. And in addition to our new subscribers, we continue to see increasing activity of our audience through mobile and social engagement.

Slide 4 highlights our revenue by segment. Revenue in North America was $26.2 million, representing year-over-year growth of 4%. In Europe, revenue was $11 million, representing year-over-year growth of 7%. Local currency revenue – Europe revenue growth was 9%.

On slide 5, the North America year-over-year revenue was $1.1 million, and it was driven by an increase in travel revenue due to increased spend by certain vacation packages and cruises as well as continued growth in our Getaway voucher offering for hotels. This was offset by a decrease in local revenue from reduced number of vouchers sold per deal compared to the prior-year period as well as lower search revenue.

On slide 6, the Europe year-over-year revenue was $700,000 and due primarily to our travel revenue driven by increased spend by certain vacation packages, cruises, and Getaways.

Slide 7 provides some detail on our non-GAAP operating income and non-GAAP net income. We generated $4 million in overall non-GAAP operating income, of which $2.5 million was from North America and the rest was from Europe. Our investments have lowered. Our current operating income, however, we believe they will drive our long-term growth. Our non-GAAP 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 the non-GAAP operating margin. The cost-of-revenue percentage increased due primarily to increased deal syndication expenses driven by increase in the relative volume of syndicated deals. Our non-GAAP operating margin was impacted year-over-year by our continued investments. Remember, during Q3 of last year, we had not yet embarked on the development of our hotel booking platform. This investment alone represents over 2 percentage points of our margin.

Before I review the operating expenses, I wanted to describe the background of the $22 million GAAP charge related to our unexchanged promotional merger shares. We entered into agreements with 34 states to resolve those states’ claims related to their unclaimed property audits. As we previously disclosed in our reports filed with the SEC in our forms 10-K and 10-Q, multiple states have claimed that certain shares of Travelzoo, which were not claimed by former shareholders of Travelzoo.com Corporation following the 2002 merger were unclaimed property.

While we disputed the states’ claims, we determined that within our best interest to resolve the disputes and settle with 34 of the states. The multi-state settlement relates to an approximate 700,000 shares of Travelzoo that those states claim maybe subject to escheat. An additional 15 states remain that have or may raise claims on the remaining 400,000 shares that were not exchanged following the merger by the residents of those states.

We expect to make one time cash payments to the 34 states after further due diligence, which we’ll intend to make from cash-on-hand. To cover those payments, as well as the potential future settlements with the remaining 15 states, we recorded an estimated $22 million charge included in our GAAP net income for the three months ended September 30, 2013.

We excluded this $22 million charge from our non-GAAP results due to the unique nature of this matter and to allow for better comparison with our historical results. The appendix to this presentation includes a reconciliation of our GAAP to non-GAAP measures.

Okay. Moving on to slide nine, this slide captures operating expenses excluding the $22 million charge. Our North America operating expenses increased year-over-year by $1.7 million due primarily to our headcount related investments over the last year.

North America expenses increased as a percentage of revenue due primarily to our continued investment in the development of our hotel booking platform. Note that, last year at this time, we had not yet started our development for hotel booking.

Europe operating expenses increased due to our investments as well, and as a percentage of revenue Europe expenses decreased. We did not significantly increase our spend on subscriber marketing as we were balancing this goal with our other investment needs. We expect increased operating expenses next quarter from increased marketing and professional costs, as well as development costs for our hotel booking platform.

Turning to slide 10, this shows our headcount increased slightly this quarter by four full time employees. We have cautiously added headcount in our seasonally slower second half.

The revenue per employee metric you see on this slide decreased year-over-year primarily due to the hotel investments that we have. We expect this metric to improve as we monetize our hotel booking offering upon our launch next year.

Moving on to slide 11, we continue to maintain solid collections, and we are growing our cash balance. We ended this quarter with $77.9 million in cash and cash equivalents, up from prior quarter as a result of our operating cash flow of $2.2 million.

Turning to slide 12, in summary, we delivered strong growth in travel revenues for this quarter for both of our segments that are at overall 16% year-over-year growth rate, which was offset by lower local and search revenue. Although, our operating income continues to be impacted by our investments, we believe that these are sound investments and will drive long-term growth.

Lastly, we are maintaining our strong financial positions with positive cash flow, growing cash and no debt.

Looking forward into this next quarter, we expect the following. We expect total sequential revenue to be relatively flat based upon our expectation that local revenue remained flat, travel revenue will grow to offset an expected decrease in search revenue.

For expenses, we expect overall total sequential expenses to increase approximately by 700,000, about half of which is driven by our increased investment in our hotel booking platform.

We remain confident even with our seasonally slower second half which we are in the middle of that we are in a good position to continue our investments in areas we expect to fuel future growth.

This concludes the financial summary of our third quarter. Chris will now provide an update on Travelzoo strategy.

Christ Loughlin

Thank you, Glen, and hello again everybody. Please allow me to start by highlighting on slide 14, how our business grows. On the X axis, you can see that we are growing our audience and on the Y axis, we are increasing our revenue per subscriber over time.

Our current investment strategy falls into two areas, first, we are investing in audience growth, not just by expanding our traditional email base, but increasingly we are adding Facebook fans, Twitter followers and downloads to our iPhone and Android apps and second, we are investing in product development.

We are focused on improving our engagement in conversion levels through better visual presentation and simplified ease of use. We are also expanding our product portfolio to allow users to search for what they need, where they need it and when they need it. Our focus is primarily on mobile and hotels. So let’s turn to the next slides to review how we are doing.

On slide 15 you can see that over time audience growth has been a key driver of our revenue growth. We added 200,000 net new email subscribers during the quarter and net new email subscribers are old subscribers or new subscribers net of unsubscribes.

In this quarter we saw a larger than normal number of technical unsubscribes particularly from Yahoo. Technical unsubscribes normally occur when an ISP shut its email boxes and due to this larger than normal technical unsubscribed rate, our net new subscribers is somewhat disappointing this quarter, compared to the actual number of new subscribers we welcome to Travelzoo.

In addition to email subscribers, we are focused on building our mobile and social audiences. We ended the quarter with 2.2 million app downloads or installs on iPhone and Android, and 1.8 million fans across Facebook and Twitter. We saw over 1 million unique users using our apps in the quarter and in social we added 350,000 new fans. We are now one of the most active travel brands in social media.

While we continue to grow our audience, we are also focused on growing our engagement levels, 14% more subscribers were active in this quarter when compared to Q3 of 2012, purchases by returning buyers were up 14% year-over-year. We plan to continue our investments in audience growth and engagement.

On slide 16, I’d like to highlight our second strategic element. Through product development, we are expanding our relationships with subscribers and suppliers, and over time this increases our business opportunity.

Historically, we have been a brand that provides the subscribers sure snappy money saving travel email alerts. Our email products most notably, our top 20 list have enormous followings and when we recommend a deal, subscribers react and suppliers benefit from a significant search in incremental business. Our Q3 travel results are evidence that this business continues to flourish.

We will continue to focus vigorously on this business opportunity but after million of positive trips and experiences over the past 15 years, many of our subscribers see Travelzoo as their trusted go-to-brand for travel and lifestyle needs. They still won our sure snappy money saving travel alerts but they also won access to our deals through mobile and search.

To enable this behavior, we need to offer our subscribers the ability to find deals around their concrete needs, if you like that what, where and when of travel planning. We also need to make it easy to book on any device. Similarly, with very strong supply side relationships, many of our hotels, tour operators and cruise agents have been working with us for the last 10 years. These clients rely on our ability to provide them a huge surge during a limited period of time but they’d also like to see year round business from us.

The next slides illustrates that we’re already beginning to modify our products to fulfill these needs. On slide 17 you can see how we have enhanced our homepage and site search. And these enhancements were tested during Q3 and rolled out in the last week.

At the top, you can see our homepage content is now localized around the subscriber’s location and as example, a California subscriber sees Mendocino hotel perfect for a quick Getaway.

The page below shows our enhanced search function. For the first time, search is now visible on every page across our site. Previously search was only available on the home page.

Subscriber engagement, number of searches, time on site and homepage signup metrics are all improving as a result of these enhancements. We’ve got much to do but we are pleased with these early wins.

Slide 18 demonstrates how we continue to leverage our social media opportunity. Our local deals and Getaways pages now show user rating. You can see that there is 95% thumps up rating right here. These ratings come exclusively from our subscribers and improved conversions.

We ask our subscribers to let us know about their experience after local deal or Getaway is consumed. We have now collected over 300,000 user reviews. On an average, our dealer score 90% positive rating which we are very pleased about. At this time, we are exposing only the percentage rating but in time, we plan to expose the complete review file. Exposing this data helps with conversions in search engine optimization but we’ll also reinforce the quality of our deals.

Below you can also see how Facebook comments is into break it into our deal stages. Our subscribers post into Facebook comments right here on our pages. And those comments then make that way into the subscribers Facebook feed for their friends to see. With this module, we’ve seen many instances where one subscriber comments they like a deal then have friends chime in. And all of a sudden three or four people are booking the deal together.

Facebook comments integrations makes it easier for our subscribers to tell their friends about our deals. To-date, we have seen over 7000 comments posted directly on our deals pages.

Turning to slide 19, I would like to highlight how mobile had been a catalyst to much of our product strategy. In our original email format, we did not index the what, where and when of Travel planning in our database. And we didn’t -- and we didn’t control the booking experience, we linked to over 2,000 websites of various experiences.

Adapting to mobile means re-engineering our information architecture and systems to empower the what, where and when and deliver a simple booking experience. Enhanced maps, which you can see here launched this quarter on the iPhone app.

And this is a really good illustration of a mobile first product to Travelzoo. Here we display our dealers by location and type, represented by simple icons. And this empowers a very, very easy what and where search. It doesn’t give you when yet but it gives you what and where.

What I love about this product is that it doesn’t use a single word or instruction. It’s very, very, very intuitive. So if you just look at this and find the Getaway, North of Santa Rosa, now you see it’s very, very easy to use and very quick.

With over 40% of our traffic now mobile and 1 million users inside of our apps this quarter, we will continue to focus intensely on the mobile opportunity. It’s exciting already that every one and a half minutes we sell a local deal of Getaway on the mobile product. We’ve just started the mobile journey and we see a lot of opportunity ahead. It’s very exciting.

Turning to slide 20, I’d like to review the progress of our hotel booking platform. We are building the booking platform to make it easier for subscribers to search when hotel deals are available on web and on mobile and to streamline that booking experience.

Today, as I mentioned, I have to go to thousands of websites to make the booking and in many cases that doesn’t work on mobile. If you look at this picture here, you can see for this particular hotel, it’s not possible to make a booking on a mobile phone, you would have to do it on web or you would have to make a telephone call.

The new platform will also provide hotels with a more flexible approach to access Travelzoo -- Travelzoo’s audience. We are nearing completion of the hardcore development and integration work with our existing systems and are currently expecting a beta launch in Q1.

I’ve seen the product and I’m very excited about it. We can actually make bookings internally today if we want to. We take the time necessary to build a high quality product for consumers’ that fits within our existing portfolio and meets our high quality brand tenants.

Turning to Slide 21, I want to remind everyone that quality underpins everything that we do. Quality experiences drive, repeat and referral behavior, helping our brands thrive over the long run.

Concluding on slide 22, our areas of focus for 2013 are first and foremost, we plan to maintain our quality leadership position by publishing high quality deals and tightening brand control. We want to reaccelerate topline long-term revenues by investing in audience growth and engagement across e-mail, web, social and most importantly, mobile.

We are also investing in products to simplify and improve our business as I have demonstrated, particularly our online booking capability for hotels and our mobile products and lastly, we plan to invest for future 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. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Dan Kurnos of The Benchmark Company. Your line is open.

Dan Kurnos - The Benchmark Company

Hey. Great. Thanks. Good morning. Thanks for taking my questions, guys. Chris, if we were having this conversation a year ago and it would have been all about reaccelerating subscriber growth and investing to get to that goal. We saw deceleration this quarter. I know you called out some email unsubs, but you guys pulled back about $1 million quarter-over-quarter in marketing spend. So, I’m just wondering if there is sort of a change in strategy. You did talk about more towards Twitter and Facebook, and I’d like to hear your thoughts on how you plan on pursuing subscribers and what the overall strategy is going forward there?

Chris Loughlin

First of all, Glen, can you clarify, Dan’s …

Glen Ceremony

Yeah.

Chris Loughlin

… points on the spend, because I’m not sure that’s quite right?

Glen Ceremony

Yeah. We’ll do, we’ll do. Hi, Dan. Yeah, the marketing pull back that you see is related to our search -- reduced search spending. It’s not related to our subscriber marketing. But having said that, we didn’t accelerate our subscriber marketing, and to your point, I agree, last year at this time we would have said we wanted to spend more, but I think we are just balancing.

Last year at this time, we weren’t also making a pretty big investment in our hotel booking platform either. So, I think we are just trying to balance those needs, so with that decrease that you see, it is primarily due to the reduced spend on the search.

Dan Kurnos - The Benchmark Company

And so, would it be fair to say that based on your Q4 guide on the expense front, it sounds like you’re still focused on the hotel booking platform and re-accelerating that subscriber growth is not necessarily a top priority at this time?

Chris Loughlin

Well…

Glen Ceremony

Yeah. Let me -- go ahead, Chris.

Chris Loughlin

No. Please go ahead.

Glen Ceremony

Okay. I think we are going to do the same thing. We are going to balance what we need to spend on hotel booking, and I wouldn’t expect a significant increase in subscriber spend from the levels that we are looking at now, but we spend it when we can, right, so it helps, right. It’s not going to be a dramatic increase in Q4. We are a bit more cautious in the second half of the year because of the seasonality of our business.

Dan Kurnos - The Benchmark Company

Got you.

Chris Loughlin

Dan, just to give you a flavor there, Dan, we were -- in Q3 we were spending all the way to the end of the quarter. We didn’t pull back on the subscriber marketing. It’s certainly one of our key strategic initiatives to grow that subscriber base overtime, but as Glen pointed out, we balanced that with a need to invest in products.

You have to balance the audience growth versus audience engagement. We’ve done a really good job on audience engagement. We’ve got almost a million more subscribers active this quarter compared to a year ago in the same quarter. That’s without spending on marketing. It’s thinking about how we can engage the folks we have already got and we do balance the need to grow with the desire to get them engaged.

Dan Kurnos - The Benchmark Company

Okay. That’s helpful, Chris. I appreciate the extra color on that. Let me ask to you speaking of caution, just a macro question on travel. We heard from eBay last night that there is a pretty big deterioration in e-commerce growth rate from Q2 to Q3 and then subsequently into Q4. I’m wondering if you are seeing any domestic weakness or signs of domestic weakness early on in the Q4 travel season.

Chris Loughlin

No evidence so far, Dan.

Dan Kurnos - The Benchmark Company

Okay. Great. And then, Glen, maybe if you have this number, would you be able to give us what Getaways growth was in the quarter?

Glen Ceremony

It was strong, right. I think we were -- we continue to be pleased about that performance in both Europe and in North America, particularly in Europe, I think with the good weather and the U.K. really saw strong Getaway performance there, so double-digit similar to last quarter.

Chris Loughlin

Yeah. Dan that really does embolden us on this hotel booking strategy. And if you think about it today, if you go to the Travelzoo website and you say I would like to have a hotel in Sonoma this weekend, it’s very difficult for you to find that even though I’m staring right now at a fantastic deal that have been -- that it is available.

And when we see those travel numbers this quarter, in particular the Getaways, we’re absolutely involved in around this idea of making our deals date searchable and bookable and expanding hotel offering to us subscribers.

Dan Kurnos - The Benchmark Company

Okay. Let’s jump over to research and local vendors real quickly. On the local side, you had some pretty easy comparisons. Clearly, there is some competitive pressures in that market. Were there any disruptions from the website changes in terms of conversion rates, was there something else behind the scenes that drove the weakness and really how do we think about search and local going forward here?

Chris Loughlin

Well, let me address both of these for you. First of all on Search, Search was predominately the Fly.com product where we saw some weakness. There are two things happening. One is we are seeing an increase in mobile traffic and monetization on mobile is not a strong as WAP.

I think you will also see that over a kayak in that public numbers. And we have to figure that out. The second is that we simply weren’t able to spend as much on marketing efficiently. So we have to rethink how we’re going to market. And if you look at lot of dramatic players what they did early on is they acquired a lot of free traffic through SEO.

Fly.com didn’t do a particularly good job of that because we were relying on Travelzoo traffic. And I think we just have to -- we have to rethink how we’re going to get awareness onto that product over time. Those are the two key things there in Search.

In local, the story that is actually quite interesting not just sold overall was up, conversions on our pages are up. The filtering definitely had an impact. It was plus 10% impact on conversions. So all the stuff we’re doing on the sites were really very positive. In fact, new buyers was up year-on-year and constant with last -- the previous quarter repeat buyers was at an all-time high and mobile was up 40%.

So all of those things are really good. And it seems that there is no problem with the format what is concerning is that the number of voucher sold per DO particular for spa deals and the activity deals was significantly lower.

In Gateways, we don’t see that as much, as we do on the low cost side. So that’s the key, one of the key trends. The other thing is on the local sides and not so much the hotel side is the take rate pressure that we see.

So we have to address those. On the -- what can we do here is, one is I think reinforcing the quality as soon as we put out a quality deal itself. That’s never changed. I am staring at a deal right now in Chicago that sold 600 vouchers for brunch deal. So I mean, that works.

So rethinking quality, we are coming into a gifting period. And I think we need to improve our gifting experience. Mobile, it still quite difficult to find what you need on Travelzoo’s mobile experience. The mapping function we recently put out is definitely a positive but we’re filtering and someone’s needs to be able to open map and say I need a restaurant in San Francisco tonight. And we’ve got that content, we just need to make it easy to find.

And then just in general growing our mobile usage and mobile downloads will drive it too. Today that’s what’s going on in those two areas right now.

Dan Kurnos - The Benchmark Company

Yeah. That’s really helpful Chris. Thanks. And just one last one for me and I will step aside. You talked about the booking platform. I think you mentioned in your remarks that it would go live in Q1. I don’t know if that was something you said specifically but I am curious when you think it will actually see impact what your results and then Glen maybe you could update us on -- if there has been any change to what the actual incremental quarterly spend is on the platform from what you had previously announced?

Chris Loughlin

Glen, why don’t you go ahead and answer both of those questions?

Glen Ceremony

Sure. Sure. Yeah. The incremental is -- we’re expecting is about $300,000 incremental on the spend compared to this quarter. And Dan, I wanted to get back to you on this and answer you more directly on the Gateways, total Gateways overall was over 50% growth.

Dan Kurnos - The Benchmark Company

And the timing of when you guys think the booking platform might be incremental results?

Glen Ceremony

So we’re looking at beta testing towards the end of this quarter beginning in next year. So when it becomes impactful, I would say with that lag, if remember the rev rack is based on when the stay occurs and not the booking. So we’re probably looking at more like late second half of next year.

Dan Kurnos - The Benchmark Company

All right. Great. Thanks very much guys.

Chris Loughlin

Thank you.

Glen Ceremony

Great. Thanks Dan.

Operator

Thank you. And I would now like to turn the program back to Mr. Loughlin.

Chris Loughlin

Okay. Well, thank you, Operator. Ladies and gentlemen, thank you very much for your time and support. We look forward to speaking with you again next quarter. Have a nice day.

Operator

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

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