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Travelzoo Inc. (NASDAQ:TZOO)

Q3 2010 Earnings Call Transcript

October 21, 2010 11:00 am ET

Executives

Chris Loughlin – CEO

Wayne Lee – CFO

Analysts

Ed Woo – Wedbush

Operator

Good morning everyone, and welcome to the Travelzoo third 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’s 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 third 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 like to first 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 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, 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 three parts because I anticipate that we have many new participants on this call who are not familiar with Travelzoo, I would like to quickly provide an overview of our business. So let us start on slide 5.

First, I want to clarify that Travelzoo is not a travel agent. We are a leading global media business. As you can see here on the left, many financial journalists often lump us even with publicly traded online travel agencies or OTAs such as Orbitz and Priceline. We do not sell travel nor do we take travel bookings. Rather, we recommend travel and entertainment fields on our Web site and in our newsletters. With a weekly audience of over 21 million subscribers worldwide, we are a global leader in travel and entertainment information. And you can see here on the right just how large we are compared to other leading traditional publications.

On slide 6 you can see that Travelzoo is indeed a global brand. Just five years ago, principally all of our subscribers were guided in the US, and we only published deals in English within the 50 states. Today, 38% of our 21 million subscribers live outside the US, and we publish in 11 languages. As we have scaled, we have maintained a strong focus on quality. On the right, you can see our demographics within the US, and the picture is generally the same across the world. Travelzoo subscribers earn well above the average, and they love to travel.

On slide 7 I want to illustrate the key input into our business. Our team of over 100 deal experts, research and review offers from thousands of travel and entertainment and local businesses. If those deals are indeed outstanding, we recommend them to our subscribers, and we charge an advertising fee for doing so. The great thing about travel and entertainment deals is that the deals themselves serve as exciting content, and high quality companies offer outstanding deals. Because we have enormous group buying power with our 21 million subscribers, we are often able to negotiate even better deals making Travelzoo’s deals extra special.

Throughout this process, staff in our test booking centres in Chicago and Munich are checking the deals that we publish to ensure that they continue to be available and easy to book long after the deals are published. On the right are some of the deals that we have recently published, and as you can see, Travelzoo is not about low quality, last-minute deals. We publish deals to surprise and delight our audience, and put the unobtainable within reach. You can also see that we are not just about travel deals, we have excellent coverage of theatre, sports and life style as well.

Turning to slide 8, this is really the slide that excites me, because it brings out relationship with our subscribers to life. Look at this lady on the left, she says on Twitter that Travelzoo makes her want to quit her job, sell everything she owns, and go and travel. On the right, this Facebook user says that he took a trip to Iceland, a place he never thought he would go because Travelzoo inspired him. But whenever you speak with a Travelzoo subscriber, the story is generally the same, they love what we do and have been loyal for years. This relationship is only possible because we have stuck by our rigorous and consistently high-quality standards for more than a decade. The quality and consistency of what we do is loved by millions.

That concludes the overview of our business; I will now discuss our third quarter 2010 results. Let us all turn to slide 10. Here I highlight the key performance metrics for Q3 2010. Revenues grew 17% to $27.7 million. Our earnings per share more than doubled from $0.08 to $0.22, and subscribers grew to $18.7 million. We are particularly pleased with these results, especially given Q3 2010 had 13 Top 20 publishing days compared to 14 in the prior year period. I will address this point later in the presentation.

The next slide provides more detail on our operating income. Operating income for the company in Q3 2010 was $5.7 million that consists of operating income of $5.5 million in our North America business, and an operating income of $200,000 in Europe. In Q3 2010, we reached profitability in Europe for the first time; this is a major milestone for the company. Our income tax expense was $2.1 million, resulting in a net income of $3.7 million, and our effective tax rate for Q3 2010 was 37%. As you can see on this chart, these are all significant improvements on Q3 2009.

Turning to slide 12, let us look at our revenue by segment. Revenue continued to grow in North America year-over-year by 12%, the same as the previous quarters. Europe revenue increased 37% year-over-year, and in local currency terms, we increased by 45%. Our growth rate was unfavorably impacted in Q3 2010 because the quarter had one less Wednesday than in Q3 2009. Wednesdays are significant in our business because our flagship publication the Travelzoo Top 20 is published on Wednesdays, and represents significant advertising revenue. This effect was more pronounced in our new markets where the Top 20 is still the primary revenue source.

On slide 13 I illustrate the improvement in operating income. North America grew by 50% year-over-year and Europe made significant headway as it moved to profitability. This resulted in operating income of $5.7 million. Slide 14 gives us more insight into operating expenses. Operating expenses in North America increased slightly compared to Q3 2009, primarily due to an increase in marketing expense of Fly.com, and an increase in salaries primarily due to new hires from our new local deals business. However, because our revenues increased by 12%, as a percentage of revenue, operating income decreased from 74% to 67%.

The next slide takes a look at our operating expenses in Europe. Operating expenses increased by $100,000, but decrease as a percentage of revenues from 125% to 92%. Slide 16 shows that our headcount increased from 208 in Q2 of 2010 to 232 this quarter, and revenues per employee decreased to $477,000. The majority of our new hires are in local deals who joined in September, and also Fly.com in Germany, who also joined in September. We intend to increase productivity as revenue grows.

On slide 17 I would like to talk about our audience. In North America and Europe, our audience increased by 400,000 subscribers compared to Q2 2010. The three bars on the far left show year-over-year increases; the next three bars show quarterly increases. The chart on the right shows that we added 1.2 million subscribers but we also unsubscribed 800,000 subscribers. So the net increase was 400,000. In Q3 2010, AOL and Yahoo closed approximately 225,000 email boxes, and as a result, we also had to remove these as subscribers.

Finally, slide 18 takes a look at our cash management, DSOs, days sales outstanding increased slightly to 49 days compared to 45 in Q2 2010 but this was similar to 48 days in Q3 2009. We ended the quarter, with $34.7 million in cash and cash equivalents.

Let us now move on to the final part of the presentation, Travelzoo’s growth strategy. On slide 20 I summarize our three pillars. First, we are scaling the Travelzoo business in attractive international markets, building a global brand and publishing global content. Second, we are expanding our content and product offering into entertainment and local deals. And third, last year we launched Fly.com and meta-search engine where we see great synergies with the Travelzoo publishing business.

Slide 21 illustrates our growth opportunity. On the Y axis we have our revenue per subscriber, and on the X axis we have the total number of subscribers. You can see that the majority of our growth over the last five years has come from expanding our audience, particularly in new markets. Today we have 10 million more subscribers than we did five years ago. This has helped us significantly increase revenues. At the same time we also increased revenue per subscriber by $1.40 from $5.30 to $6.70.

We are very pleased with this progress, and we achieved what we set out to do. While we intend to grow our audience at or above the same pace as we have in the last five years, we also want to focus more on increasing revenue per subscriber, primarily through higher sellout rates as our sales teams in new markets expand and become more experienced, and through the introduction of new products like entertainment and Local Deals. I will share some more information about local deals later.

Slide 22 gives you an idea of how big we think our audience could be. If we look at our existing penetration in the US, we are at 4.2% of the total population. If we assume a penetration of 5%, then we would have an audience of 29 million in the six markets in which we operate. At a penetration of 7%, we are already looking at an audience of 41 million. If we add additional markets such as Italy and the markets that operate under the Travelzoo brand in Asia Pacific, we are looking at potential audience of 40 million to 60 million (inaudible) subscribers.

Slide 23 focuses on our new business, Local Deals. We established Local Deals as a separate entity, Travelzoo Local Inc., a wholly owned subsidiary of Travelzoo Inc. on Aug 24 to handle all aspects of publishing and selling Local Deals’ vouchers. Local Deals is generally a new type of content for Travelzoo and include restaurants, spas and local festivals. We allure [ph] our subscribers to these Local Deals within their area, and then they buy a voucher from a merchant via the Travelzoo Web site.

We report the revenue from Local Deals on a net basis. In Q3, we published 44 deals in 11 cities most of them were published in September, and we sold approximately 25,000 vouchers, our average selling price is $33. Overall, revenue from Local Deals in Q3 was not significant, and we generated a small loss from the business as we incurred start-up costs. One notable aspect of Local Deals is that they can go viral very quickly, and here you can see some Twitter announcements where people are talking about Local Deals, and this is partly due to the fact that they are local by nature so locally interesting, and also that we (inaudible) that they have to reach in order for the deal to be activated.

On slide 24 we report the progress of Fly.com. Searches exceeded 10 million for the first time in Q3 2010, and we now have the beta version of the site available in Germany. We are confident about our ability to win on price, accuracy and speed, however the business continues to incur significant losses as we scale.

Our last slide 25 summarizes management’s focus for Q4 2010, and for the year of 2011. Our international expansion is very successful, and we would like to continue growth in Europe while extending profitability. We want to continue to expand our coverage of entertainment deals, not just in North America but also in Europe, and we are rolling out Local Deals very rapidly. As of 11 am today, Local Deals is now in 14 cities. New York went live on Tuesday, and this morning Fort Lauderdale and Philadelphia went live and that happened after the earnings release.

As we scale, we want to become more efficient, and improve operating margins in our core businesses. We want to continue to publish and sell global content opportunities. We want to grow the Fly.com audience, and the revenues there and finally, we intend to improve earnings 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. This concludes our prepared presentation, and I will turn back to the operator now for the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Thank you. Our first question comes from Ed Woo with Wedbush. Go ahead please.

Ed Woo – Wedbush

Great quarter, guys.

Chris Loughlin

Thanks Ed.

Ed Woo – Wedbush

The first question I have is on Fly.com. How do you see it rolling out in terms of in the US, I know you mentioned that you just launched it in Germany. What about any opportunity to get [ph] it outside of HACR?

Chris Loughlin

Outside of HACR?

Ed Woo – Wedbush

Yes, hotels and car rentals.

Chris Loughlin

Ed, if you would, we are quite pleased with the progress we are making on the rollout in the US. I think I have mentioned before, I look at that product and access it based on are we able to compete on these three elements, price, accuracy and speed? And in the US we certainly are. In all areas, we come up equal, if not top. And so the usage in the US is good. We would like obviously to be greater scale and that is a business that does have certain fixed costs. As soon as we get over that fixed cost hurdle, then we are able to take the business to profitability but that requires scale.

So the core flights business, I think we have made good progress and we have got good usage in the US. In Europe, obviously we are just starting out. With respect to additional products such as hotels and holidays, we honestly are not focused on that right now. We would rather focus on getting the core aspect right, and then go from there. But it is not a stretch to think at some point you would cut those in. It is just not something the folks have done right now.

Ed Woo – Wedbush

Great, and the other question I have is on Local Deals. What are we seeing out there in terms of competitive marketplace?

Chris Loughlin

It is an interesting question Ed because, you know, as a publisher, as an Internet publisher, you cannot publish the same content day after day; it does not matter if it is Internet or traditional, you cannot publish the same content day after day. So everybody in this space, be it Travelzoo or Groupon or any of these companies, we cannot go to the same subscriber and tell him or her the same news tomorrow as we said today. That also puts a limit on the number of times you can work with an individual local business.

So from a competitive standpoint, where would you feel the competition? You would feel it in not being able to get access to those companies, but given the natural barrier, if you like, it seems that we are able to get the deals, and we are not locked in moving a business forward. We obviously have the significant advantage over many of the other smaller start-ups in the space that we have got 21 million subscribers. We launched our business into New York on Tuesday with a spa deal that was a relatively expensive price point too. It was $125, and we have already sold 1314 vouchers. That is complete in new incremental opportunities Travelzoo, and it is only possible because we have got a very large audience here in New York.

Ed Woo – Wedbush

Great, well good luck.

Chris Loughlin

Thank you, Ed.

Operator

Okay, I will now turn it back to Mr Loughlin.

Chris Loughlin

Thank you, ladies and gentlemen, for your time today, and that concludes the end of our call, and I look forward to speaking to all of you when I see you. And my door here in New York is always open; please do stop by if you would like to learn more about the business. Thank you. Have a good day.

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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