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Travelzoo Inc. (NASDAQ:TZOO)

Q2 2010 Earnings Call

July 22, 2010 11:00 am ET

Executives

Chris Loughlin - CEO

Wayne Lee - CFO

Analysts

Ed Woo - Wedbush Morgan Securities

John Lewis - Osmium Partners

Noah Steinberg - G2 Investment Partners

Operator

Good morning everyone and welcome to the Travelzoo second quarter 2010 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 Chief Executive Officer. Sir, you may begin.

Chris Loughlin

Thank you, operator. Good morning and thank you all for joining us today for Travelzoo’s second quarter 2010 financial results conference call. I am Chris Loughlin, Chief Executive Officer. With me today is Wayne Lee, the company’s Chief Financial Officer.

Wayne Lee

Good morning everyone, welcome to our conference call.

Chris Loughlin

Before we begin, Wayne will walk you through today’s format.

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.

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 at www.travelzoo.com/ir, beginning approximately 90 minutes after the conclusion of this call.

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

Chris Loughlin

Thank you, Wayne. Our presentation will fall into two parts today. First, I will talk about our financial performance, and second, I will provide an update on our growth strategy.

So let’s to turn to slide 4. I would like to highlight our key performance metrics for Q2 2010. We are quite pleased that our revenues grew by 19% to $28.1 million. Our earnings per share doubled from $0.10 to $0.20. Subscribers grew to 18.3 million.

The next slide provides more detail on our operating income. Operating income for the company in Q2 2010 was $5.9 million. That consists of operating income of $6.7 million in North America and an operating loss in Europe of $800,000. Our income tax expense was $2.7 million resulting in our net income from continuing operations of $3.2 million. Our effective tax rate in Q2 2010 was 46%. As you can see in the chart here, these are all significant improvements on Q2 2009.

Turning to slide 6, we see our revenues by segment. Revenues in North America grew by 12% year-on-year, maintaining a growth rate we had seen in previous quarters. In Europe, revenues increased 49% year-on-year and in local currency terms, they increased 55%.

In Q2 2010, we experienced a series of macro events that affected our performance in Europe, including the ash cloud, airline strikes, postponed travel demand due to the World Cup and the great prices. These events hampered our advertiser confidence.

On slide 7, you can see that our operating income increased year-over-year from $3.4 million to $5.9 million despite an increase in salaries and employees expenses due primarily to higher headcount and greater investment in Fly.com marketing.

Slide 8 and 9 give us more insight into our operating expenses. First, here on slide 8 we can see that operating expenses in North America increased slightly compared to Q2 2009. However, because our revenues increased by 12% operating expenses decreased as a percentage of revenue, from 71% to 64%.

On slide 9, we can see that European operating expenses increased by $1.5 million. This is due to increased spending on subscriber acquisition and marketing of Fly.com. However, as a percentage of revenue, operating expenses decreased from 125% to 110%.

Moving on to slide 10, this shows the headcount increased from 201 in Q1 2010 to 208 in this quarter, and revenues per employee decreased from $542,000, but remains stable versus Q2 of 2009.

On Slide 11, we focus on audience growth. On the left hand side here, you can see our annual audience growth since 2007. From the end of 2007 to the end of 2008 we grew by 9%. From the end of 2008 to the end of 2009 we grew by 24%. And since the beginning of this year we’ve already grown the audience by 9%. To the right hand side, you can see that in Q2 we added 1.1 million new subscribers, but we also unsubscribed 600,000 subscribers. So we have a net increase here of 500,000.

Finally, page 12 takes a look at our cash management. DSOs, days sales outstanding, increased slightly to 45 days compared to Q1 2010, and we ended the quarter with $31.9 million in cash and cash equivalent.

Let’s now move on to the second part of the presentation and look at our growth strategy.

On slide 14 you can see that we have three growth pillars. First, we want to multiply the Travelzoo business in attractive international markets. We have now rolled the Travelzoo business model into Canada, the UK, Germany, France and Spain. In two of those markets, Canada and the UK, we have been profitable for three consecutive quarters and revenues continue to grow.

As we scale into international markets, we also want to leverage our market position to create new exciting content for our existing subscribers. We believe this can lead to new advertising opportunities. For example, in Q2 2010, we introduced Salvatore Ferragamo estate in Tuscany to our 12 new subscribers in the US. We didn’t just recommend the resort on a standalone basis we helped the resort create a package offer with a tour operating in the New York area including flights and hotels. Prior to our international expansion, this type of intercontinental advertising sales opportunity just did not exist in our business.

Second, we are expanding our content and product offering into entertainment, including Broadway on western shows like Disney’s The Lion King, or events such as Major League Baseball and Premiership Rugby, as well as constants and attractions. By focusing on this content category, we are able to engage with our subscribers more frequently and at a very local level.

The third, last year you see we launched Fly.com, a meta-search engine. We grate synergies between Fly.com and the Travelzoo publishing business. We also believe that in the long run this is an opportunity with attractive economics on its own.

Let’s now take a deeper look at the international expansion on slide 15. While we continue our growth in North America in Q2 2010, that is a 14% year-on-year, we’ve been focused primarily on growing our audience very rapidly in Europe at a rate of 50% year-on-year. 23% of our audience of the 18.3 million subscribers now resides in Europe and that is indeed very exciting. Asia-Pacific as most of you know is now independently owned under a license agreement. So the worldwide Travelzoo brand now reaches 20 million subscribers.

On slide 16 you can see that the international expansion comes at a cost. Looking at the first blue chart, you can see that excluding subscriber acquisition, operating income from North America and Europe would have been $0.54 per subscriber. Once we take out subscriber acquisitions and other expenses, we arrive at an operating income of $0.36, the blue bar with taxes at $0.17 per subscriber. So our resulting EPS is $0.20 per subscriber.

Slide 17 and 18 shows that we continue to make good progress on our international expansion. Using the UK as an example here on slide 17, you can see how overtime the increase in subscribers drives increasing revenues and how the revenue growth ultimately drives operating income. The white bars are year-to-date numbers. It is really very exciting here to see that in the first half of 2010, excluding Fly.com, we’ve generated a profit of 1 million pounds in the UK. For me personally, I’m very proud of what we’ve achieved there given that we started that business just five years ago. Our strategy of building subscribers, investing in the audience and generating revenues from them, and ultimately turning to a profit is working in the UK, it’s working Canada.

On slide 18, I’d like to show the progress we are also making in the other countries in which we operate. With profitable [paragon] you see in the UK and Canada, and as you can see, we’ve got a very impressive operating margin in Canada now of 48%. In the UK we are 20%, in Germany, France and Spain we are still incurring losses, but you can see here that these are decreasing. So it’s pretty good news.

You can see that our revenues in Q2 in France, when compared to the other countries, is relatively low. In addition to the macro events I outlined earlier, we haven’t really started focusing yet in France on hotel sales, relative to the other markets you see here. So we’ve got strong hotel sales in the UK, in Germany, in Canada, but not in France at this time. We are addressing this opportunity by hiring and training French advertising sales managers to focus primarily on the domestic opportunity.

From our last slide, I would like to summarize again where management focuses. Our international expansion is proving very successful and we would like to continue our growth in Europe. We would like to achieve an overall profit in Europe within the next three quarters, and we think that’s realistic. We would like to monetize our 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 like the Salvatore Ferragamo deal that we published this quarter.

The expansion in entertainment on Fly.com will continue, adding further revenue per subscriber and we believe greater subscriber engagement. And finally, as we have demonstrated over the past three quarters, we intend to continue improving earning per share as our revenues continue to grow.

Travelzoo’s consistent practice is not to provide guidance for future periods because of the dynamics of the industry. Therefore, we will conclude our prepared discussion and I’ll turn back to the operator now for the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. The floor is now open for question. (Operator Instructions) Our question comes from Ed Woo from Wedbush, your question please.

Ed Woo - Wedbush Morgan Securities

Chris, welcome aboard and congratulations on the first quarter. My question is what is the overall outlook for Europe right now? I know you mentioned that you already had the euro weakening and issues with the countries in Europe. What do you think the outlook is for the back half and you can see the rapid acceleration of subscribers continuing for the next couple of quarters?

Chris Loughlin

So, what happened there in Europe? You know the biggest impact we saw was indeed the World Cup. All four of those countries that we operate in were in the World Cup and as soon as each country popped out the other side, then all of a sudden everyone started focusing again on selling travel. The ash cloud was disrupted, the British Airways say it was disruptive and then the Greek crisis definitely had an impact on the European cycle.

In the week after England came out of the World Cup, we had a record week in the UK top 20, so that was positive. I would say that the situation, I can’t predict whether there will be another volcano erupting or any of these events, but certainly I can’t imagine that there will be as many disruptions in the third quarter as it were in the second. It was almost just one after the other.

With respect to building our audience, we see no reason why we should slow down our momentum in audience growth. We are adding a fare click in the UK, and you see there in the UK we are indeed profitable. So, we can do it at a profit as well, not just at loss.

Ed Woo - Wedbush Morgan Securities

And has the average user of Fly.com happy to see that you guys added multi-city functionality into that. Do you want to have any comments about what your status is on Fly.com and where do you see it going in the next couple of quarters?

Chris Loughlin

So we are very pleased with Fly.com. In Q2 we had, in North America we had 4.9 million searches. Sorry, we had 6.25 million searches, up from 4.9 million searches in the prior year. That’s a 30% increase year-over-year, so very pleased with that. You might have seen the TV advertising that we ran for Fly.com, so we experimented there. The great opportunity with Fly.com is further integration with the Travelzoo brand. We do have in North America 12 million subscribers, worldwide 20 million subscribers, and more the subscribers we can introduce to Fly.com, the more traffic we can get.

The other thing that you get overtime with any business that we saw that in the UK, we’re seeing it with Fly.com is as each quarter progresses, each year progresses, the efficiency and the monetization you can get more product, improves. We really do see that in every business. It’s not a surprise, we all learned out of business schools too. Most businesses take three years to really hit the inflexion point, but we are making tremendous progress there and we are very excited.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of John Lewis from Osmium Partners. Your question, please.

John Lewis - Osmium Partners

Chris, welcome aboard and nice quarter. I guess first off, I noticed recently in July you guys re-launched the US homepage for Travelzoo, and I’m just curious if you can give any comments on the effects of the (inaudible) by the first one in five or six, seven years?

Chris Loughlin

When you say launch, it’s been a work in progress for just under a year and we got the US homepage and the [site life] about a month ago, the UK and the rest of Germany and the rest of the markets will go in the next few months. The primary reason was in fact with our advertisers, giving them a place to showcase their properties, their crew ships in maybe a slightly more appealing light. The old site functioned very well. It was very popular with our subscribers. The new site seems to have been received very well by subscribers. But where you see the most positive comments coming is from the travel industry and the fact that now on the homepage you’ve got these large photos and I can show you what it looks like inside Virgin America that makes a big difference. So, that’s where the positive response has been. In respect to traffic, I mean traffic remains relatively constant. There is no fundamental change to the usage on the site. So, it was a good change, and I think in turn I think everyone kind of feels positive about it too.

John Lewis - Osmium Partners

And I think the site looks great and I’m just curious if bringing up the question would really reflect the economics of the business in terms of the ability to showcase more inventory or anything like that, but it sounds like it’s related to just improving the user experience right now?

Chris Loughlin

Right now [it is bound] for the user experience. I mean you do see on that homepage that we’ve got a space dedicated to entertainment. We had a very successful entertainment and local yields business up over the last three to four years, and so having the opportunity to show you those deals in a dedicated space, we’ll have obviously a positive impact and it does open up some inventory, but that wasn’t the primary motivation. It was really, it was about stepping up into the next phase of the business. The only thing we’ve got a top brand here, a brand that our subscribers love, our advertisers respect and we’ve got an opportunity like Starbucks had, maybe 15 to 20 years ago to build this global brand, and that website now represents our brand aspirations as the old site, while again it functions very well and it did the job and the information you got was absolutely correct. It didn’t necessarily represent our brand aspirations.

Operator

Thank you. Our next question comes from the line of Noah Steinberg from G2 Investment Partners. Your question, please.

Noah Steinberg - G2 Investment Partners

I just had a question on media prices in Europe due to the World Cup and other events. Did you see any change there, it seems like you are able to keep down your sub-acquisition expense in Europe, while at the same time increasing your subs pretty nicely?

Chris Loughlin

Yeah, if you look at Q2, I mean it usually follows like this in Europe. Q1, certainly in January you get very low media prices because consumer goods pull out and travel companies are still gearing up. Q2, it starts to move up certainly for quality travel space because you are moving closer to the summer holiday period. And then, towards the backend of the year consumer goods come in and prices go up. So, that has not changed, and if you look at those CPAs year-on-year, they are relatively consistent over Q2 in Europe.

Noah Steinberg - G2 Investment Partners

Okay. And the other question I had was regarding earnings per share, you have increased it nicely. It increased sequentially over the last, I think it’s now four quarters. Can you continue increasing it over the course of the year?

Chris Loughlin

I mean at least we have a stated goal that right at the end of the presentation that is a strong focus for management. Our intention is to continue with this good progress, and of course we will work hard towards that goal.

Operator

Thank you. I will now turn the program back to Mr. Loughlin.

Chris Loughlin

Thank you ladies and gentlemen for joining us today. If there are no further questions, we will now end the conference call. And thanks again and please feel free to contact me directly at the office here in New York if you do have any further questions. Take care.

Operator

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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Source: Travelzoo Inc. Q2 2010 Earnings Call Transcript
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