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Travelzoo Inc. (NASDAQ:TZOO)

Q1 2010 Earnings Call Transcript

April 26, 2010 11:00 am ET

Executives

Holger Bartel – CEO

Wayne Lee – CFO

Chris Loughlin – EVP, Europe

Analysts

Ed Woo – Wedbush

Noah Steinberg [ph] – G2 Investment Partners

Operator

Good morning everyone and welcome to the Travelzoo first quarter 2010 financial results conference call.

At this time all participants have been placed on 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, Holger Bartel, Travelzoo’s Chief Executive Officer. Sir, you may begin.

Holger Bartel

Thank you, operator. Good morning and thank you all for joining us today for Travelzoo’s first quarter 2010 financial results conference call. I am Holger Bartel, Chief Executive Officer, and with me today are Wayne Lee, the company’s chief financial officer; and Chris Loughlin, Executive Vice President, Europe.

Wayne Lee

Hello everyone, welcome to our conference call.

Chris Loughlin

Good morning everybody.

Wayne Lee

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 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.

Factor 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 Web site at www.travelzoo.com/earnings.

Please refer to our Web site 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 Web site at www.travelzoo.com/ir, beginning approximately 90 minutes after the conclusion of this call.

For the format of today’s call, Holger will review management’s prepared presentation, and we will then conclude with a question-and-answer session. If you will please now open our management’s presentation, which is available at www.travelzoo.com/earnings, I will now turn the call over to Holger.

Holger Bartel

Our presentation will fall into two parts. First, I will talk about financial performance, highlights of our financial performance, and then second I will provide an update on our growth strategy.

Let us all turn to slide 4. I just want to highlight key performance metrics for Q1 2010. We are quite excited, our revenues grew by 24% to $28.5 million that is a new record for our company. Subscribers grew to 17.8 million, and our earnings per share are up from $0.13 to $0.15 year over year. This is a 15% increase.

On the next slide, I am providing more detail on the operating income. As you have heard, operating income for the company in Q1 2010 was $5.2 million that consists of operating income of $6.2 million in North America. In Europe, our operating loss decreased from $1.3 million to $1.0 million. We then had $200,000, which is primarily a foreign currency loss, taxes of $2.5 million, and our net income from continuing operations was $2.5 million. Our effective tax rate is slightly down from 53% to 50%.

On slide 6 let us look at revenues first. Revenues continued to grow in North America, year-over-year growth is 12%, very similar to previous quarters. In Europe, we are quite excited that even though the base grows, we can still maintain the pace of doubling revenues year over year. In Q1 again, our revenues doubled versus the previous year, in fact they increased 107% in US dollars, in local currency they increased 91%.

Slide 7, I already mentioned in our press release that we continued to invest in subscriber acquisition as well as in Fly.com. If you compare Q1 2010 versus the previous year, we actually spent over $1 million, exactly $1.1 million on subscriber acquisition in 2010 compared to Q1 2009. Also Fly.com added over $2 million in expenses versus the previous year. We started Fly.com in February 2009. Nevertheless in spite of these investments of over $3 million, our operating income is still up from $4.5 million to $5.2 million.

Slide 8 gives us more insight into operating expenses. First operating expenses in North America increased by $1.8 million, and as a percentage of revenue they increased from 65% to 67%. What is driving this? The two main reasons for the increase are an increase in salary and employee expenses and an increase in staff that is approximately $700,000, and then it is an increase in marketing for Fly.com that is another $700,000.

On the next slide, we are looking at operating expenses in Europe. We also saw an increase there by $2.8 million but as a percentage of revenues, operating expenses actually decreased from 140% to 111%. We are getting closer to the 100% mark, which is actually where we want to be as soon as possible because that represents our breakeven point. What is driving the increase in operating expenses in Europe is an increase in staff, also increase in salaries and employee expenses that adds up to about $900,000, and we also invested significantly more on subscriber acquisition in Europe that is an increase of $800,000 year over year.

Page 10, our headcount increased from 193 to 201 this quarter, only very slightly, but since our revenue is much more than that, we actually increased profit productivity. In fact, revenues per employee are now at $568,000, which is the highest level we have seen in almost two years.

Page 11, I would like to talk about our audience. In North America and Europe, our audience increased by 1 million subscribers. On the left hand side, the increase on the four left hand bars is a year-over-year increase, the last one is obviously only a quarterly increase, though this year we are growing at a similar pace as we did in all of 2009. The right hand side, we actually added 1.5 million new subscribers. We unsubscribed 0.5 million subscribers, so the net increase is 1 million.

Finally on page 12, a look at our cash management, we have some really good news here. DSOs, days sales outstanding, decreased further and are now at 44 days, very happy about that, and our cash balance also jumped. It is now over $30 million at the end of Q1. This increase is primarily due to the sale of our Asia Pacific business segment, which occurred in Q4 last year and related tax benefits to that.

Let us now on the second part look at our growth strategy. On slide 14 I am summarizing again what is our growth strategy. We have three elements. First, we want to multiply the Travelzoo business in attractive international markets. We want to build more global content, and we want to build and expand our global brand. Second, we are expanding our content and product offering into entertainment that is for example Broadway shows, sports events. And third, last year we launched Fly.com, a meta-search engine where we see great synergies with the Travelzoo publishing business. We also believe in the long run it is an opportunity to attractive economics.

Let us first look at international expansion. Slide 15 takes us back to 2005. Five years ago, we really operated only in the US, and we had just launched a small operation in the UK. But as you go to the next slide on 16, you will see how we have been growing in Europe primarily as well as we opened operations in Asia Pacific. At the end of 2008, we were at 14.6 million subscribers around the world.

Slide 17 shows where we are today at the end of Q1 2010. We continued our growth in North America, 18% year over year, but in Europe it is really where we are very focused on growing our audience very rapidly, 60% year over year. Asia Pacific, as most of you know, is now independently operated under license agreement. Worldwide, the Travelzoo brand now reaches over 20 million subscribers. That is a great audience. There are not a lot of media companies, particularly in travel and entertainment that I believe can offer this kind of reach to subscribers [ph]. In North America and Europe alone, we are reaching 17.8 million subscribers.

The international expansion however comes at a cost. On slide 18 you see that operating income from North America and Europe, excluding subscriber acquisition, would have been $0.54 per share. Once we take subscriber acquisition expenses off and other expenses, we arrive at an operating income before taxes of $0.30, taxes are $0.15 per share, so our EPS is $0.15.

The next two slides really excite me, I love those two slides, slide 19 and slide 20 talk about how we are making progress on our international expansion, and everything is going exactly as planned. Slide 19 shows you for the UK as an example, how over time the increase in subscribers drives revenues, and how the revenue growth ultimately drives operating income. The white bars are quarterly numbers and it is really exciting to see that in Q1 2010, we generated a profit of 500,000 pounds just a quarter only in the UK. So you see, our strategy of building subscribers, investing in subscribers, generating revenues from them, and ultimately turning a profit is working very well in the UK.

On slide 20 I would like to show you where we spend in the other countries. In the UK and Canada, we are profitable. In fact, both in the UK and Canada, as you see towards the bottom of the slide, our operating margins doubled year over year. In the UK, we are now at 23%, we exclude Fly.com from this chart just because it is not part of our deals publishing business. Canada is now at an operating margin of 46%. Germany, France and Spain, which we launched much later are still incurring losses, however as you can see, they are decreasing.

From our last slide, number 21, I would like to summarize again where our management focus is. Our international expansion is very successful, and we would like to continue the growth in Europe. We want to move these operations closer to profitability and achieve a profit all across Europe as soon as possible. We would like to monetize the larger audience in North America and increase efficiency and operating margin in our core business.

With 20 million subscribers now worldwide, we want to sell more aggressively to the global audience and we are already producing more and more global content. The expansion into entertainment will continue, and we want to grow our Fly.com audience and revenues. And of course, we also intend to improve earnings per share as our revenues continue to grow.

Wayne Lee

Travelzoo’s consistent practice is 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.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And our first question comes from the line of Ed Woo from Wedbush.

Ed Woo – Wedbush

Great quarter guys. The question I had is, first of all, have you noticed any change in the competitive landscape either for your newsletter business or possibly with Fly.com. And second of all, how will you characterize the overall environment in the travel industry either with travel providers or for online travel advertising? Thank you.

Holger Bartel

Hi Ed, I would like to give this to Chris.

Chris Loughlin

Hi Ed, thanks for your question. I do not think much has changed in the – you (inaudible) Fly.com, right, so I do not think much has changed in terms of the competitive landscape. You have got a couple of large players in the market, you compete in that space on the technology product, we think we have got a great product on pricing. So, the price of the flights you can offer, we have got some outstanding prices, and I am not sure if you are still that new, so we now still have the OpEx prices in the Fly.com engine in the US. And speed, recently we ran some tests in Europe where we now feel that we are in fact the fastest amongst the four incumbents. So, on competition I think we are doing a pretty good job and we do not see anyone new. Sorry, what was your second question?

Ed Woo – Wedbush

Yes, how do you characterize the overall environment for travel right now in the industry either for travel providers or for online travel advertising?

Chris Loughlin

I think you are seeing strong demand across the board in the western market at this time. Obviously the ash cloud had an impact on all travel companies over the last ten days or so, and I think you can see that there has been an awful lot of disruption. So, probably who will benefit from that it is the domestic providers. We recently, actually on Friday we went out to our UK audience and asked what was the impact on our subscribers. Say 25% of subscribers say that they were in fact impacted by the ash cloud, but they continued to plan to travel, 80% say it is not going to have any negative effect on their summer plans, and a lot of people who were going to book during that period booked domestic travel. I was at a conference last week here in London. The outlook certainly seems to be a lot stronger than last year.

Ed Woo – Wedbush

Great, thanks and good luck.

Chris Loughlin

Thank you.

Operator

(Operator instructions) Our next question comes from Noah Steinberg [ph] with G2 Investment Partners.

Noah Steinberg – G2 Investment Partners

Hi guys, great quarter. Just a quick one on pricing outlook stronger than last year in terms of overall travel spend [ph] advertising spend by our customers. Are you seeing any opportunity to raise price?

Holger Bartel

Well Noah, there are two answers to that really. First of all, I think pricing, our ability to price and increased prices really depends on the economy overall, and in particular the travel industry as well as competition. On the one hand, we definitely see that the travel industry although is improving is still in a very bad shape, particularly in the hotel business, as we work with so many hotel partners all across the world, their RevPAR revenues per average room are down, and we just do not feel it is the right time right now to significantly increase prices. We still provide a lot of great returns for them in this difficult time but we also have to take into account that the rates just overall are lower.

This does not mean though that our revenues will not increase because I am not sure everybody understands how we are actually pricing. As our audience continues to grow, it means that for example, let us say we increase the audience in North America from 10 million to 12 million, very few of our advertisers actually purchase the entire audience. So a lot of our advertisers purchase increments of that audience. So let us say for example 2 million, now what that means is that we can actually send in the newsletter, to the 12 million people, we can send 6 offers, to 10 million we could only have sent 5 offers.

So even if the price, the rate for this 2 million is the same, it still allows us to increase our revenues and that is why we continue to invest into growing our audience.

Noah Steinberg – G2 Investment Partners

Got it. Then also just one on entertainment, how many cities do you offer entertainment? How many cities would you sell, you know, in New York you would sell Broadway show, but are you offering that in Europe as well?

Holger Bartel

In the US, we actually do offer it in all US cities. We of course are stronger in some cities than in others, but Europe, Chris, do you want to comment?

Chris Loughlin

I know – actually, we have a team based in London who are building out that business, so it is predominantly UK based that does include London, Edinburgh, Manchester, even Belfast and one of the greater successes we had in the first quarter was in fact in the Manchester area. I think we had over 4,000 tickets sold for (inaudible). We are also running it in Germany and France we are staying but not to such a great extent, not something of course we would do over time.

Noah Steinberg – G2 Investment Partners

Great, great quarter guys. Keep it up.

Chris Loughlin

Thank you.

Operator

Thanks. There are no further questions in the queue.

Holger Bartel

Ladies – yes Wayne.

Wayne Lee

Ladies and gentlemen, we thank you for your 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 teleconference. You may disconnect your line at this time. Have a nice day.

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