Travelzoo's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.18.14 | About: Travelzoo Inc (TZOO)

Travelzoo, Inc. (NASDAQ:TZOO)

Q1 2014 Earnings Conference Call

April 17, 2014 11:00 AM ET

Executives

Chris Loughlin - CEO

Glen Ceremony - CFO

Analysts

Dan Kurnos - The Benchmark Company

Ed Woo - Ascendiant Capital Markets

Operator

Good morning, everyone. And welcome to the Travelzoo First Quarter 2014 Financial Results Conference Call. At this time, all participants have been placed in listen-only mode and the floor will be open for questions following the presentation. Today’s call is being recorded.

Before introducing your host and beginning the Company’s presentation, the Company would like to remind you that all statements made during the conference call and presentation and the Company 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 may vary differently 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 the Company’s Form 10-K and 10-Q and other periodic filings with the SEC. Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements whether as a result and information, future events or otherwise.

Please note that this call is being webcast for our Investor Relations Web site at www.travelzoo.com/earnings. Please refer to the Company’s Web site for important information, including the Company’s earnings press release issued earlier this morning along with the slides that accompany today’s prepared remarks. An archive recording of this conference call would be available at Travelzoo Investor Relations Web site at www.travelzoo.com/ir, beginning approximately 90 minutes after conclusion of this call.

Now, it’s my pleasure to turn the floor over to your host, Chris Loughlin, Travelzoo’s Chief Executive Officer. Sir, you may begin.

Chris Loughlin

Thank you, Operator. Good morning and thank you for joining us today for Travelzoo’s first quarter 2014 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. For the format of today’s call, I will review our first quarter financial results and then Chris will provide an update on our strategy. Thereafter, we will open the call for our question-and-answer session. Now, please open our management presentation which is available at www.travelzoo.com/earnings, to follow along with our prepared remarks.

Slide 3 provides the key financial highlights for the quarter. Our revenue for the quarter is 40.2 million down 5% year-over-year due to Search and Local revenue. Our earnings per share of this quarter was $0.31 which is lower than the prior year period earnings per share due primarily to lower revenue, a higher effective tax rate and investments in our hotel booking platform. Our subscribers grew 3% year-over-year along with continued mobile app downloads.

Slide 4, highlights our revenue by segment. Revenue in North America was 26.4 million representing a year-over-year decline of 12%. In Europe, revenue was 13.8 million representing year-over-year growth of 13%. Europe revenue growth in local currency was 6%. The next two slides cover further detail of our North America and Europe segments.

On Slide 5, North America year-over-year revenue decreased by 3.5 million, half of which was due to a planned reduction our Search marketing spend and the other half was due to lower voucher sales. Our travel revenue was impacted by lower voucher sales to Getaways as well as lower spend by some advertisers including certain online booking engines and trusted international airlines. We believe our North America Local and Getaway revenue may have been impacted by the severe weather during this quarter.

On Slide 6, the Europe year-over-year revenue increase of 1.5 million was due primarily to a 20% year-over-year growth in our travel revenue, driven by increased advertising by travel agencies, booking engines and the vacation packages, as well as continued growth in Getaway’s revenue. This was partially offset by a decline of 400,000 in Europe Local revenue, a portion of which was evenly driven.

Slide 7 provides some detail on our operating income and net income. We generated 7 million in overall operating income of which 4.6 million was from North America and the rest was from Europe. Our taxes remained flat in dollar terms compared to prior year, however the tax rate did increase and it was driven by the fact that we no longer have accumulated operating losses from Europe’s startup years to offset our current European income. Net income for this quarter was 4.6 million versus 5.6 million prior year.

Slide 8, shows the cost of revenue and operating margin. The cost of revenue as a percentage of revenue increased year-over-year primarily due to increased deal syndication expenses driven by the higher volume syndicated deals on Web sites like LA Times and Chicago Tribune. In addition, there were step cost in customer service, as well as certain customer refunds related to our German Local deals. Our operating margin increase quarter-over-quarter, due to seasonality and was impacted year-over-year by lower revenue and our continued investments in our hotel booking platform.

Moving onto Slide 9, North America operating expenses decreased year-over-year by 3 million due primarily to a planned reduction of our Search marketing spend, as well as a lower earned commissions and bonuses. Europe operating expenses increased by 900,000 however they decreased as a percentage of revenue given the strength in Europe’s revenue this quarter. We did not significantly increased subscriber acquisition marketing spend compared to prior year. We expect increased operating expenses next quarter from increased marketing and professional cost and continued development cost for our hotel booking platform.

Turning to Slide 10, this shows that our headcount increased this quarter by eight full-time employees in Europe. We plan to remain cautious on hiring and remained focused on maintaining and overtime improving productivity.

Moving to Slide 11, we continue to maintain solid collections. We have maintained our positive operating cash flow, and we have a substantial cash balance of $61 million. This cash balance did decline from last quarter as a result of stock repurchases of 5.6 million, as well as an additional unclaimed property settlement payment of 1.2 million.

Turning to Slide 12, in summary, we delivered solid growth in our European travel revenue of 20%, which was offset primarily by lower North America revenue in Search and Local. In addition, we are maintaining our strong financial position with solid collections and no debt while continuing stock repurchases.

Looking forward to next quarter, we expect the following; we expect Search revenues to continue to decline by approximately $1.5 million to $2 million versus prior year period. This is driven by our planned reduction in Search marketing spend focused on improving profitability. We expect Getaways to be seasonally slower. We expect to continue our investment in hotel booking platform, which will result in an approximate 5% or $0.05 EPS impact, about a penny more than Q1.

In addition, we expect to incur increased levels of professional cost for various initiatives, as well as increased levels of marketing cost. Overall, we remain confident in our solid financial position and product investments that we are making to enhance the experience of our subscribers and the results for our advertisers.

This concludes the financial summary of our first quarter 2014. Chris now will provide an update on Travelzoo’s strategy.

Chris Loughlin

Thank you, Glen and hello everyone. Let me start on Slide 14 by pointing out the key inputs into our business. On the X axis, you can see that we are growing our audience, and on the Y axis we’re increasing our revenue per subscriber overtime. Our current investment strategy falls into two areas. First, we are investing in our audience growth, not just by expanding our traditional e-mail customer base, but increasingly we are adding Facebook fans, Twitter followers and downloads to our mobile apps. We are also focused on further engaging our existing audience. And second, we are investing in product development. We are reengineering our products to allow users to easily search for what they need, why they need it and when they need to go and our focus is primarily on mobile and hotels.

So let’s turn to the next slide to view how we are doing. On Slide 15, you can see that overtime, audience growth has been a key driver of our revenue growth. We added 823,000 net new e-mail subscribers during the quarter, that’s net of unsubscribed. We believe that by growing our audience further, we can continue to grow our revenue as shown in the bottom left of this slide. In addition to e-mail subscribers, we are focused on building our mobile and social audiences. We ended the quarter with over 3 million app in stores. We saw a record number of new end stores this quarter. We also have over 2 million fans across Facebook and Twitter. Mobile, including smartphone and tablet users is 40% of our traffic over million people are now accessing our brand every week through a mobile device.

Turning to Slide 16, I’d like to highlight our second strategic element. Through product development we are expanding our relationships with subscribers and suppliers and overtime, this increases our business opportunity. Last quarter we announced that we will begin a performance review of our Search products. On the left you can see why. Since 2011, our Search revenue has been in decline. Recent trends effecting Search include a more challenging traffic bind environment, the move to mobile while we currently offer our SuperSearch product and to an economic in flight.

In Q1 David White who joined from Yahoo! began a performance review of Search and is developing a growth strategy that addresses the changing market dynamics. Our review is still in progress but can already confirm that Search will remain an integral part of our strategy going forward. In addition to delivering revenue and profit Search drives subscriber growth, giving us the flexibility in publishing air fare deals and helps to sell other deals like hotels and activity deals. The knowledge that we use who wants to travel to a certain destination on specific date will become increasingly valuable to our business as we offer a broader hotel product. While we conduct our performance review we’ve decreased our Search marketing spend, and this impacted our revenues in Q1. As Glenn mentioned, we expect to continue a reduction through Q2, while revenues will be down $1.5 million to $2 million compared to the prior year period.

Turning to Slide 17, I’d like to update you on our new hotel booking platform which we began testing in late March with the old consumers. We’re investing in this new product for a number of reasons. On the consumer side we’re making it easier to do business with us. Prior to the booking platform consumers could not book where and when they wanted to go, they had to accept the places and dates in the deals that we offered. And many loyal Travelzoo subscribers booked our full priced hotels with other Web sites, because it was simply impossible to book with us. A large number of users did not want to deal with that hassle of buying a voucher.

On mobile it was also very difficult to book on very small hotel Web sites, because their booking engines are not mobile optimized. On the hotel side Travelzoo could only help hotels one to four times a year. We were never able to sell full priced business. And many hotels didn’t work with us either because they were unable to operate on the voucher model or they were opposed to running advertising, they preferred a commissioned model.

From Travelzoo’s perspective, we were unable to participate in the upside of peak season. The map on the right illustrates the problem we faced. Hotels charge higher rates in peak season and thus agents like us receive a higher commission. Because we only offered off season deals our economic value to the hotel was simply lower.

We’ve also found over the years hotels limit their activity with deals especially if they have to pay an advertising fee. So for example, if a New York hotel wanted to promote through advertising, they may just run to the Northeast United States but of course it makes perfect sense to tell everybody all over the world about the deal of the New York City hotel.

So how are we doing? Let’s turn to Slide 18. We’ve now introduced about 200,000 subscribers to the new booking platform while it’s still very early we’ve seen some very interesting data points to support the investment thesis. Of the subscribers who have booked so far 84% have never purchased Getaway on Travelzoo before. And during our test period hotel revenue among those who booked was $54. In the prior two years the average hotel revenues that includes all of the advertising revenue and all the voucher sales revenue from those consumers with approximately $13 per year.

Turning to the right of the slide, you can see what’s happening on the hotel side. Almost half of all bookings we delivered to the newer platform were full priced. That business we would never have had before. Below you can see that over half of the hotels are working with some new platform if not on the Travelzoo in over two years. The Boulders, a Waldorf Astoria Hotel and the Hilton, New York Midtown both received over 300 bookings in the test period. Both were running full priced rates, we noticed the rates were very good and selling very well and then we were able to promote them to a broader audience. The New York Midtown Hilton hasn’t been on Travelzoo, has not been on Travelzoo for 11 years. So we’re delighted to have them back. While we’re in very early stage of the taking consumer bookings and have much to do, we’re encouraged by these early data points.

Let’s turn to Slide 19 to examine what we have in store for the remainder of 2014 for this new product. In Q2 we’re already busy enhancing UX, adding more hotels and improving our rates. We’re gradually introducing the booking platform to more subscribers messaging that they can now book any night of the year on Travelzoo. We expect further expenses of approximately $1.1 million in Q2 as we continue to perfect the product.

Turning to Slide 20, I’d like to remind everyone that the bookings we generate on the booking engine are recognized upon stay. This is different to our advertising of voucher businesses where the revenue is recognized upon booking. In our test period we found the guest are booking an average of 60 to 70 days in advance of stay. We’re encouraged with our test data and we look forward to ramping this new business quickly.

Turning to Slide 19, I’d like to update you -- turning now to Slide 20 I apologize I’d like to remind everybody the quality underpins everything that we do. Quality experiences drive repeat and refer behavior, helping our brand’s side over the long-term. Since the beginning it’s been about quality as well as it will always be about quality.

Concluding on Slide 21, our areas of focus for the remainder of the year first and foremost to maintain our quality leadership position by publishing high quality deals and tightening brand control. We’re accelerating top-line growth through audience engagement and products particularly our new hotel booking engine and mobile. And lastly we plan to invest for the future while remaining profitable.

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

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. (Operator Instructions) Our first question comes from Dan Kurnos of Benchmark. Your line is open.

Dan Kurnos - The Benchmark Company

Yes, hi. Good morning. Thanks for taking my questions. Let me just start on the travel side here, first the North America travel has been, the growth rate has been declining pretty steadily for the past few quarters now. I know that you guys called out possible weather impacts and it sounds like Getaways was a little bit softer this quarter. Is there anything else that you can sort of point to as to why North America has been, the growth rate has been slowing? Was there any impact from the reintroduction of Travelocity in the quarter? And just maybe talk about the overall health of the North American market. Thanks.

Chris Loughlin

Hi, Dan. Thank you. The decline was really due to a decline in Getaways as well as reduced spending by the online booking engines and international airlines. We give you that there was some impact with us with the weather I mean if you think about it, if you are sitting in New York City and you have got to drive out to Connecticut or to Massachusetts for a getaway and you can’t get through that snow, that’s going to be difficult. As you know there were a record number of flights canceled in that quarter, so it’s difficult to get to even further afield. And I believe now that there is a lot more demand for Caribbean flights in these months than we have seen historically because people are just wanting to getaway and prices on Caribbean flights are now through the roof. So, we certainly feel that there was an impact through that but that’s simply what happened.

Dan Kurnos - The Benchmark Company

Okay, and then just in terms of well I guess maybe this is for Glen then. Could you just at least give us a sense of what total Getaways did combined in the quarter up or down?

Glen Ceremony

Yes, combined it was high the single-digits percentage year-over-year growth but that’s a little deceiving because the Europe is still growing strongly with over 35% growth but we had some decline in North America.

Dan Kurnos - The Benchmark Company

Alright, great, thanks, that’s really helpful. And then, Chris, I mean look I can't imagine you were pleased with the way that Local performed in the quarter. I guess I just want to get a sense of sort of what the game plan is to improve productivity going forward. You did mention in your prepared remarks that or Glen did at least, that you are going to be cautious on headcount going forward. So if it’s lower vouchers, how do you re-stimulate that demand, I am assuming that you are continuing to face the take rate headwinds, so that probably isn't changed at all? And then I will follow-up after you answer that question.

Chris Loughlin

Thanks, Dan. I mean the first thing just to point out is that as a brand we are very excited about Local and Local being restaurants, entertainment bars, activities because it allows our subscribers to engage with us more often. And when we look at the data we do see that travelers who book flights and hotels then do consume our restaurants. And so that on the face is just exciting. The business is also, the combined business of entertainment is also very profitable, so that’s exciting.

The format of the voucher is clearly something that we are working on and is a challenge. When I just look at the overall Internet opportunity for Local, of course it’s massive but nobody is completely cracked the code yet. We will test other formats in addition to our voucher format and direct format with some advertisers. But we remain very excited and we will continue to develop the business.

One change that we did make there is Mike Stitt is now back in the driving seat of the business. He was the guy who brought local to Travelzoo. He has been with the business for many years. We opened the Chicago office together about 10 years ago and he has got some tremendous ideas and an awful lot of energy to develop new concepts. And so, he was the guy who was there in Des Moines in the beginning of Local and I am confident with Mike we will be able to develop formats that consumers like.

Dan Kurnos - The Benchmark Company

That’s really helpful, Chris, thanks. And just and you have talked before a little bit about maybe getting more aggressive in China, is there any update there?

Chris Loughlin

Sorry in where?

Dan Kurnos - The Benchmark Company

In China or in Asia markets bringing that in and getting that more involved in the Local side.

Chris Loughlin

Well, that I don’t know about.

Glen Ceremony

Yes so, the Asia business right now, we have our brand license in Asia and that we sold that business in 2009 but we do have an option to acquire that back at some point in the future, so they are operating as a separate company right now, licensing our brands and technology?

Dan Kurnos - The Benchmark Company

And no plans to reacquire that, that’s what I was getting at in the near-term?

Glen Ceremony

Yes, since we have this option, we look at that from time-to-time and look at that business and I think it’s a great opportunity for the future to have that option.

Dan Kurnos - The Benchmark Company

Okay, fair enough. And then just one last one from me and I’ll step aside on the hotel side I don’t know how much of an answer I’ll get from you guys but I mean what the bookings platform is there any way you can give us sort of at least generically what kind of contribution you are expecting this year and then next year from the hotel booking platform?

Chris Loughlin

Yes I think it’s a little too early to say I think probably by the time we get to the next call we will be able to get some sort of answer on that, but we all are looking really more a metric in the first period here and we like what we see. So we are seeing the changing consumer behavior, changing hotel behavior in a positive way. The business is very, very early stage I just got an e-mail out to everyone here in the Company and it’s sort of a kin to when we started that European business I remember we were making losses in that European business we were $300,000 in revenue roughly in the second quarter of being in business and today that thing is annualizing around $50 million with $10 million in annualized profit. So we are really at that beginning it is May 2005 for that business.

It probably goes a lot faster obviously because we have an audience build now we have hotel relationships but the business is early stage and for me it’s tremendously exciting. We launched many new businesses in this Company and we have been quite successful at doing that so metrics are -- I am encouraged with.

Dan Kurnos - The Benchmark Company

Alright great thanks for all the color guys.

Chris Loughlin

Great thanks Dan.

Operator

Thank you. Our next question comes from Ed Woo of Ascendiant Capital. Your line is open.

Ed Woo - Ascendiant Capital Markets

Yes I had a question I wanted to talk about Local Deals a little bit, specifically we had a last couple quarters of pretty big weaknesses. How do you anticipate the impact either from competitive issues or is this Company specific that maybe you think you can turn around or do you think it is broader industry impacts that is much harder to change?

Chris Loughlin

Hey Ed look I think it’s clear like there is a broader industry wide decline in the whole voucher format right? I mean there are 100s of companies that failed and closed and other larger competitors are not growing in that particular category with local deals and vouchers. Consumers are buying fewer vouchers it doesn’t mean that they are not buying vouchers they certainly continue to do so for great deals but they would rather make the booking and be sure that they are going to go. So I think that the format is going to change overtime and it will change for us and it will change for the industry in general so that’s what I see there.

Ed Woo - Ascendiant Capital Markets

Great. And then going off to Search, just out of curiosity why was your Search stronger in Europe than it was in North America? And you mentioned in one of your slides that Search will be a core focus of you guys. But just curious how you guys plan to either invest in that business or turn that business around.

Chris Loughlin

Well Glen can comment on why we are stronger in Europe and then I’ll comment on the why we are out with the performance review and the growth strategy.

Glen Ceremony

Yes on Search in Europe we did get us a couple additional customers there and just as a reminder the market for the spend is inherently different right? And so there is a couple of different dynamics this quarter that we were able to take advantage of.

Chris Loughlin

And then on the growth strategy, I’m very pleased that we have David White who joined us from Yahoo! He was on -- I think he was the first employee of Efficient Frontier which was the Search agency that was acquired by Adobe. And Davis has already conducted a strategic review. He’s already pulled some cost out of the business and we’re now thinking about Search and what are the positive elements of Search for the broader business. We see for example in our performance review that we do generate a lot of subscribers that we don’t account for through Search. We have not on effect for our travel advertisers and hotels.

But if you use our core search product today on Travelzoo on the homepage you see it’s very limited. You can’t put in your date. If you want to just search for a flight on Travelzoo it would be very difficult. You have to go Fly.com where you could use SuperSearch but it still -- we don’t make it so easy. And it’s kind of ironic because we’re one of the strongest travel brands in the markets in which we operate and we don’t really have an awesome flight experience on our site. You know that we’re already developing an awesome hotel experience. The flight experience, we’ve got the assets so we can do something quite interesting there. So I think over the next quarters you’ll see some of these things being tested and ultimately Search on Travelzoo will be the direction we’re heading.

Ed Woo - Ascendiant Capital Markets

Do you think you will have to make a pretty big investment similar to your hotel booking engine in this business or is this something that is still being I guess evaluated?

Chris Loughlin

I don’t think it will be to the magnitude of the hotel engine because the flight engine already exists. We have got it now. We may need to modernize certain elements, technology in this moves very, very quickly so for example if we want to introduce a new form of flight searching into apps we may need to invest there, but it’s not to the magnitude of the hotel development.

Ed Woo - Ascendiant Capital Markets

Great and then one last question I’ve is well how do you see the overall travel industry shaping out, I know you mentioned the first quarter had pretty rough weather in the U.S. and we had a little bit of a delayed Easter but it actually builds or impacts our -- what’s your outlook getting into the summer months and how do feel about the overall travel industry right now?

Chris Loughlin

I think we feel very positive about the industry. We would like to keep the thunder and the snow out. I heard it was snowing again in New York City yesterday, so that’s not particularly helpful. In, when you’re already in April but I think they’re very positive and what we’re seeing is hotel rates are definitely increasing, demand is overall increasing so it is good timing of our introduction into full priced hotels, our booking activity is very positive and I think in general we’re pretty happy with where we’re headed. Of course we’re not happy with the Q1 results, but we see a very strong growth strategy.

And one thing I did in the quarter also as I spoke to 10 subscribers, I just picked up the phone and spoke with them and you mustn’t forget just how strong this brand is and how strong the brand affinity is. Travelzoo has helped subscribers and consumers book over $10 billion worth of travel over the last 15 years and they were positive experiences and that continues to build, so I’m very excited about the brand at the moment, probably and just I just really feel, I feel that, I feel the strength of the brand coming through.

Ed Woo - Ascendiant Capital Markets

Great, well thank you and good luck.

Chris Loughlin

Thank you.

Glen Ceremony

Thanks Ed.

Operator

Thank you. I’m not showing any further questions in queue. I’d like to turn the call back over to Loughlin for any further remarks.

Chris Loughlin

Thank you operator, thank you ladies and gentlemen, we look forward to speaking with you next quarter.

Operator

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

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