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Executives

Chris Loughlin – Chief Executive Officer

Wayne Lee – Chief Financial Officer

Analysts

Ed Woo – Wedbush Securities

Frederick Moran -- Benchmark

Judson Patterson – Morgan Keegan

Akum Bega (ph)– Bank Equity

Eric Martinuzzi – Craig Hallum

Bill Lennan – Monness, Crespi, Hardt

Travelzoo, Inc. (TZOO) Q1 2011 Earnings Call April 21, 2011 11:00 AM ET

Operator

Good morning everyone, and welcome to the Travelzoo first quarter 2011 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 first quarter 2011 financial results conference call. I am Chris Loughlin, Chief Executive Officer and 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 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 this morning. First, I’ll review our Q1 2011 financial results, and then I’ll provide a brief update on our strategy. Turning to slide five, we achieved record revenues of $37 million in Q1 2011, up 30% on the same period last year. We also achieved record adjusted operating income, which resulted in non-GAAP EPS of $0.37, up from $0.15 in the same period last year, and we had our second largest quarter ever in terms of new subscriber growth, adding just over 1 million subscribers. These are outstanding results, and we’re very delighted with our progress.

Turning to slide six, I’d like to explain why we’re reporting non-GAAP and GAAP results this quarter. Travelzoo entered into an agreement with the State of Delaware to resolve all claims relating to a previously announced unclaimed property review. Under the terms of the agreement, which was signed this morning, Travelzoo will make a one time payment to the State of Delaware for $20 million in cash, and Travelzoo will receive a complete release of those claims.

The $20 million payment will come from cash on hand. As a result, we’re recording a one time expense of $20 million in Q1 2011. As the only difference between the GAAP and non-GAAP measures is the one time expense related to the State of Delaware settlement, today’s reporting should not be viewed as the company’s intention to report non-GAAP measures in future periods.

Moving on to slide seven, we provide more detail on our adjusted operating income. Adjusted operating income for the company in Q1 2011 was $10 million. $9.3 million came from our North America business, while Europe contributed $700,000, our first significant contribution from Europe. Our income tax expense was $4 million, resulting in adjusted net income of $6 million.

Turning to slide eight, we look at revenue by segment. Revenue growth in North America was 23%, our highest quarter growth rate in four years. In Europe, revenue growth accelerated to 53% year over year, and in local currency terms, we increased by 49% ahead of our Q4 pace. Moving on to slide nine, I list rate the improvement in adjusted operating income. North America adjusted operating income increased 51% year over year, and Europe made significant headway into the black. This resulted in OpEx of $10 million.

One slide ten, we provide more insight into our OpEx. OpEx in North America increased by $1.4 million compared to Q1 2010, primarily due to new hires within our new Local Deals business, and an increase in legal and professional expenses. However, because our revenues increased by 23%, but as a percentage of revenue, adjusted operating decreased from 67 to 59%. In Europe, OpEx increased by $1.5 million as we staffed up the Local Deals, and invested aggressively in building our subscriber base; but as a percentage of revenues, expenses decreased from 111 to 89%.

Slide 11 shows that our head count increased from 255 in Q4 2010 to 296 this quarter, and revenue per employee increased $499,000. The majority of new hires during Q1 were in Local Deals, and we intend to increase productivity as revenue grows. Finally, slide 12 takes a look at cash management. DOS, days of sales outstanding decreased to 41 days compared to 44 in Q4 2010 and improved by three days when compared to Q1 2010. We ended the quarter with $51.7 in cash and cash equivalents, not taking into account the $20 million cash payment to the State of Delaware. The significant increase is primarily due to the introduction of Local Deals. In that business, consumers pay us immediately with credit cards, and then we pay merchants their share at a later date.

Let’s now move on to Travelzoo’s growth strategy. On slide 14, I summarize the growth strategy. On the X axis, we’re growing the number of subscribers that engage with the Travelzoo brand, we show our second highest increase in new subscribers in Q1 2011, and now have just under 20 million subscribers to our publications in Europe and North America. Along the Y axis, we’re growing the revenue per subscriber. Local Deals has become a substantial driver here, you can see already that we increased our revenue per subscriber from $6.70 to $7.80 from Q4 go Q1.

As we launch new markets and become more productive in existing markets, we see significant incremental revenue per subscriber gain. I’ll talk about this in a moment. Other important drivers in revenue per subscriber on the Y axis include revenues from fly.com, our flight meta search business, sales team optimization, as well as time in markets, especially in our new markets in Europe. Let’s turn to slide 15, and look at the global subscriber’s footprint. It’s very exciting that we had our second best quarter ever in terms of new subscriber growth, but perhaps even more exciting for me is to see that a third of Travelzoo subscribers now reside outside of the United States.

If we go back five years, remember that Travelzoo only operated within the United States, and principally all subscribers resided there, and we only published in English. We believe that as we continue to grow aggressively in North America, we have a tremendous opportunity there, and Europe presents an enormous opportunity ahead. Slide 16 speaks to Local Deals opportunity, and while I’m showing revenues and the opportunity on a gross basis, Travelzoo reports on a net basis, that is net of payments to merchants. Let’s start by looking at the chart on the top of the page. This gives us an indication of how we’re doing.

We established the Local Deals in Q3 2010, generating $800,000 in gross revenue. As you can see, we added 18 markets per quarter in both Q4 and in Q1, and by the end of Q1 we had published deals in 48 markets, and we generated $16.2 million in gross revenue. You can also see on this chart at the top that as time passes we’re becoming more productive in each market. Average deals per market per week increased from .28 to .76. We’re still some way behind the two deals per week that we set ourselves as a goal, so there’s plenty of opportunity ahead.

Now let’s look down below at the second part of the chart, and we’ll look at that opportunity in a bit more detail and see how it could unfold. Assuming that we penetrate 100 markets, and consistently publish two high quality deals per week, and capture gross revenue per deal of approximately $30,000 in total gross revenues, we could be at $312 million in gross revenues. If we fast forward to 200 markets, keep the frequency of the deals, but assume gross revenue slightly lower at $25,000, we would generate $520,000 in gross revenue.

Finally, fast forward to 200 markets, and assume by that time the Travelzoo audience has grown by 50% to roughly 30 million subscribers, which in turn would lead to a 50% increase in gross revenue per deal, because the local markets would obviously be larger as well, we see that the opportunity could be as much as $720 million in gross revenue.

For Travelzoo, the pace of market launches is restricted only by talent. If we onboard talented individuals who can sell to local merchants, we’re able to open markets relatively quickly. Recently we announced that Steve Savad, the co-founder of restaurant.com joined us as VP of Business Development in North America, and Glen Drury, co-founder of UK Daily Deals site Keynoir, and former regional vice president for Yahoo in Northern Europe has joined as Senior Vice President of Local Deals in Europe.

With top notch executives like Steve and Glen, we feel we’re able to attract even more talented staff and scale faster. To end the presentation, let’s turn to slide 17. Travelzoo’s strategy is to be the quality leader in travel, entertainment, and Local Deals. This deal, our one millionth deal, which was published on March 30, epitomizes our definition of quality leadership.

For $899 per person, our subscribers were offered six nights in Ireland with stays at the Four Seasons, the Ritz-Carlton, and the Condé Nast Gold List hotel, and that deal included round trip airfare and rental car. Unlike $5 deals on $10 lunches, or 50% off teeth whitening, deals like this are not easy to craft. They require a high degree of expertise and trust.

On slide 18, I summarize our focus for the remainder of 2011. We will continue to aggressively scale Local Deals in North America and Europe, while keeping our eyes squarely on quality. We’ll maintain rapid growth, especially in Europe, of our subscriber base. As we scale, we want to improve efficiency and our operating margins; continue to leverage our global content opportunity, bring fly.com to profitability, and further improve earnings per share.

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’d like to turn back to the operator and open the question and answer session. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions.) Our first question comes from Ed Woo, with Wedbush. Your question please?

Ed Woo – Wedbush

Yeah, great quarter Chris and Wayne. The question I had is obviously it’s tough to provide the Local Deal information without giving out too much information to your competitors, but qualitatively, would you be able to talk about how much of it drove the earnings growth and revenue growth this quarter?

Chris Loughlin

Hi Ed, thank you very much for your question. First, let me just apologize also; on slide nine I made an error when I referred to OpEx. I obviously meant adjusted operating income. Apart from breaking down the gross revenue in the number of markets, we thought that we really don’t want to disclose any more information about Local Deals, and that’s sort of where we’re at.

We have stated, in investor conferences and one on one where our margins sit, which is trading somewhere between the 30 to 50. We said with restaurants we tend to get a slightly higher margin than finite orders such as spas; but apart from that we haven’t disclosed any further information, and we haven’t disclosed head count. We choose not to disclose head count going forward.

Ed Woo – Wedbush

Going back to the margin question, have they been stable in the quarter?

Chris Loughlin

Yes.

Ed Woo – Wedbush

Great, and then the other question I have is on fly.com. I know fly.com has been kind of under the radar of Local Deals. Are you gaining traction on that? Are you increasing the number of searches, etc.?

Chris Loughlin

Yes, actually I met with the fly.com team about two weeks ago to review the quarter, which actually looks pretty nice. On the one hand, we are seeing an increase in usage and productivity and we also see that we’re moving closer to our goal on profitability for that business. So it’s still an important part of our business, we’re pleased with the progress. We’re not there yet, but we’re headed in the right direction.

Ed Woo – Wedbush

Good, well thank you and good luck going forward.

Chris Loughlin

Thank you, Ed.

Operator

Thank you, our next question is from Frederick Moran with Benchmark. Your question please.

Frederick Moran – Benchmark Chris Loughlin

Thank you, good morning. Chris, if you could, could you break out the gross rate of the core advertising sales, and how is the travel advertising ramping up, relative to your expectations? And then separately on Local Deals, maybe you could steer us in the direction of how many markets you ideally want to be in over the course of this rollout through the course of this year. Thanks.

Chris Loughlin

Thanks Frederick. So on the revenue, we don’t break the revenue out. I’m pleased with our progress on all our areas of business. We had a very strong performance in the UK this quarter, and North America and Canada were also quite strong. We’d like to see some improvement in the other Europe markets, and we see that coming as the audience scales; so we don’t break out that revenue from the Local Deals, but that’s how we feel about it. We stated all along, but we would like to open up roughly 15 markets per quarter, and we’ve hit 18 in the last two, so that’s an indication of where we’d like to be, but you know for us, it was never about just going out and opening up markets as quickly as possible.

It was really about finding top, top quality deals. If you look at a market like Dallas, for example, we just published an incredible deal at the Crescent. It’s not just within the Crescent hotel, it’s actually within the private club within the Crescent, and they have members who just drove to that club. That deal took a little bit longer than just going and getting a diner deal or something like that, but in the end, if you look at the productivity from that deal, it’s outstanding. From a run perspective, it’s also a great result. So we’d like to keep that pace at 15. If it’s faster, that’s great; if it’s slower, okay, but it’s a little disappointing. But when we do it, we really want to do it in a way that we produce outstanding quality deals.

Frederick Moran – Benchmark Chris Loughlin

Just to follow up, can you talk a little bit about how you find incremental deals, once you’ve been in the market for a number of months, and how much leverage there is to add such incremental deals?

Chris Loughlin

Yeah, it’s not just being within the market. If you look at a lot of the deals we’ve run, they’ve been with hotels we were already working with; the Shore Club in Miami, the Four Seasons, a lot of these deals are coming from existing relationships, but that’s somewhat incremental. But I’ll tell you a story; we either run a deal today, or we ran it yesterday or tomorrow for Nino’s in New York City, which is just by Central Park South, so that will now be the second or third deal we’ve run for Nino’s Restaurant group. So it was a good experience the first time, he likes the customers.

Our demographic tends to be slightly older, we’re told our subscribers tip very well, and of course the restaurant is quite excited to get that volume of business. So that’s really more, much more than a couple of hundred thousand dollars from one relationship, that stemmed from the very first restaurant. It just extends beyond that range, because word travels quickly, that we bring in high quality customers.

Frederick Moran – Benchmark Chris Loughlin

Thank you very much.

Chris Loughlin

Thanks, Frederick.

Operator

Thank you, our next question is from Judson Patterson, with Morgan Keegan. Your question please.

Judson Patterson – Morgan Keegan

Good morning, and congratulations on the quarter. I have three quick questions please. First, it looks like the travel industry is starting to face a little bit more pressure with rising gas prices, and now Europe’s been decelerating year over year based with that tougher comp, are you starting to see some counter cyclical effects, where now that Travelzoo is kind of at a tipping point with subscribers, that you’re starting to see more and more companies want to put deals up on your site in Europe?

Secondly, could you talk about fly.com and its competitiveness relative to I guess, kayak at this point and now Google’s acquired ITA software, so how are you thinking about fly.com over the course of a year?

And then finally, how should we think about customer acquisition costs, going forward? Obviously two very strong sub-growth quarters for trends from North America and Europe, are you really at a tipping point where we should see more efficiencies on customer acquisition going forward? Thanks.

Chris Loughlin

Yes, Judson, thank you very much for your questions. On the travel industry, we tend to, if I ever meet with investors, kind of draw the U curve of a cycle. When things are bubbling at the top, travel industry does well, because entrepreneurs who open businesses and so forth, there’s lots of activity. On the way down, we do pretty well. At the bottom, it gets tough because the middle layer of decision makers tends to freeze up, and then on the way up, it’s good for us. Oil prices, you know, they don’t necessarily have an impact on us. They have more of an impact on the airlines and cruise lines; for example, we just promoted tremendous fares to Europe for British Airways.

Yes, there was a fuel surcharge on there which was larger than the fuel surcharges last year, but the demand was still relatively strong. We also, a lot of our business, it’s not just Local Deals, but also hotel deals, and people don’t necessarily need to consume lots of oil to get there. Because the price of oil has gone up as it has, in the last 12 months, the incremental cost of a trip from New York City to Vermont is only going to cost $20.00 extra, you know, so it’s not as if the surcharge is such a huge burden.

If you say other trends, like the cost of grain and food, that’s also going up, so then restaurants are somewhat under pressure to produce deals, because prices may be higher. But anyway, deals are definitely aflow. In Europe, I don’t see anything significantly different.

On fly.com; our intention with fly.com was always to build a meta search engine that could support our need to provide our subscribers with outstanding airfare deals. More often we do that, for example in Q1, we told our subscribers in Los Angeles and in Houston about incredible fares to Barcelona and London, and we found those through fly.com. A lot of the traffic that you’re getting into fly.com does come from Travelzoo; they’re often unpublished fares and sales that airlines don’t necessarily buy billboards for, buy advertising for; and now, with fly.com, we have the opportunity to not only publish those, but monetize those.

Our intention wasn’t to be a peer play meta search business, it’s rather complementary. And then on customer acquisition, no significant changes, we’re spending more time focused on that as a point of optimization in the business, and we’ve been doing that since last July. That will continue, and never stop; but in the end we really want to acquire high quality subscribers, so we’re not interested in just adding a data base of email addresses or anything like that. We’re really interested in engagement with our subscribers.

Judson Patterson – Morgan Keegan

Got it, thank you. And a quick follow up, if I may. You’ve invested a lot in head count in the last few quarters, and you commented that you’re really just focused on getting the right personnel into place. Obviously Local Deals has had a fantastic result, ramping over the past few quarters, is it now at the point where we should start to see headcount moderate a little bit? As you get more inbound inquiries from entrepreneurs wanting to be featured on Local Deals?

Chris Loughlin

I don’t think so.

Judson Patterson – Morgan Keegan

Okay, thank you very much.

Chris Loughlin

Thank you.

Operator

Thank you, our next question is from Akum Bega, of Bank Equity. Your question please.

Akum Bega – Bank Equity

Hey guys, congratulations on a great quarter. I’m pretty sad I missed the deal you are showing on your slide 17. That would have been a wonderful deal for me. I have a couple of questions for you guys. I just want to understand, you’re in 48 markets now and you have about 20 million subs combined North America and Europe; what portion of your subs are in these 48 markets that you’re currently selling your Local Deals in?

Chris Loughlin

Akum, we haven’t disclosed that number yet.

Akum Bega – Bank Equity

I know in the past you have said that 100 markets or about 75%, is it fair to say these 48 markets, probably these are the markets where you had the maximum concentration of your subs? Is that the right way to think about it?

Chris Loughlin

I would look at it with maybe a slight pinch of salt, because if you look at the 48, some of them, like Los Angeles, we have a constant flow of deals and it’s really – it’s at full speed. And then other markets like Austin, Texas, it’s at a very, very early stage, so you could really start to look at the data there. How many subscribers got five or more deals, how many subscribers got two or more deals, etc. We’re a long way off full penetration, I guess is what I would say on this. You know, there’s just plenty of huge markets that we’re not even touching yet, so that’s kind of how I would disclose it. I don’t really want to talk about what’s the percentage of the subscriber base and so forth; but we’re not in Calgary, we’re not in Montreal. We’ve published one deal in Vancouver, one or two in Atlanta, we’ve hardly published any deals at all down in Miami lately, and that will start to compensate as the sales force kicks in.

Akum Bega – Bank Equity

Okay, in the last two or three quarters, definitely you guys have done a great job on the Local Deal, and it seems like there is a pretty strong link for this business, it’s moving very aggressively, but only now do you see the need of having more sales reps. How do you see this competing landscape evolving, let’s say a year from now, and do you think you need to be scaling up much more rapidly than what we’ve seen in the last two quarters?

Chris Loughlin

Well, I don’t think our scale is a problem, right? I mean, I mentioned the Crescent deal in Dallas. We put something like 2,600 reservations into that restaurant; I think it was 2,600, it may have been 2,400, but it was within 24 to 48 hours. Well, the place can’t take anymore, so there’s no need for further scale on that, in terms of the audience. It’s about the quality of the deals, and look at the relative base of the other deals we published in Dallas, they went to maybe a sub-sample; in fact, exactly the same audience, and they didn’t produce nearly as much in terms of revenue for us or for the establishment. Could we have got 5,000 bookings into that establishment? I think we probably could have, but we had to cut it off because that was all they could handle.

So the key factor in all of that is quality, and I said it again and again and again, for the last nine months, it’s all about quality and publishing, that’s one point you can compete on. What I’m saying within the organization is if I was a magazine, which magazine would I want to be, I’d want to be Condé Nast Traveler or I’d want to be Travel and Leisure; I don’t want to be the Wal Mart stamp or coupon book. These are very different value propositions, but both of them can be very, very successful, but they’re very different value propositions. At Travelzoo, we know who we are, what we want to be, and that’s what we’re going to continue to be, publish high quality, outstanding deals. And the other guys can go and do whatever they want to do, and I hope that they’re successful as well. There’s plenty of space for everybody.

The other thing you have to think about really, is there’s only 52 weeks in a year, we’re only publishing two deals per week, that’s only 104 in a given market. So we can be rather selective, and by being selective, you can actually squeeze quality. If you only have to publish 104 instead of 365, you can be much, much more selective, and I think you already see that coming through on the content we publish, and I hope we continue to do that.

Akum Bega – Bank Equity

That makes sense, that makes sense. Can you also talk about the scenario between your core business and your Local Deals business? You guys already have relations with a lot of hotels and airlines and cruise operators; do you see, do you foresee some of those relationships also getting translated into Local Deals that you’re publishing?

Chris Loughlin

Yes, they already are. I mean, there’s already tremendous overlap. What’s interesting about a five star hotel is that it has a restaurant that usually has to be open all day long. We never serviced that restaurant before, today we can. Those conversations are happening, so we also have relationships with spas inside of the hotels. One of the most successful deals we published recently was a deal with the JW Marriott in Chicago; that’s an extension of an existing relationship.

If you draw the circle around the customer, let’s say the customer is the hotel, previously we had one conversation, one point of contact, now we have three or four, because there are three or four things we can do for you. Of course, that’s a much more productive relationship. So you have a more productive relationship with the subscriber, and a more productive relationship with the hotel.

Akum Bega – Bank Equity

That makes sense. Just so I better understand, does that mean that some of the sales reps are doing both the jobs? They are working the Local Deals and also on the core side of the business?

Chris Loughlin

No, there will be a handoff.

Akum Bega – Bank Equity

Okay, makes sense. And a last question from my side, the settlement you guys did with the State of Delaware, what does that imply, what does it mean on your share count? How should we model the share count going forward?

Chris Loughlin

I’ll let Wayne Lee answer that question.

Wayne Lee

Yes, hi Akum. So the settlement with Delaware was for cash payment, so we’re not issuing shares as part of the settlement, so it’s just a one time cash payment of $20 million.

Akum Bega – Bank Equity

Does it mean that the three million shares which were unclaimed, were these included in the share count? Should we take those out from the share count? Or they stay the same?

Wayne Lee

The three million have not been in the share count.

Akum Bega – Bank Equity

Okay, those are not in the share count. Okay, makes sense.

Chris Loughlin

I have to say we’re very pleased with the settlement; the claim, the potential claim could have been much higher, and we could have also seen, had we issued those shares, a dilutionary effect, so settling as we did, for $20 million in cash, I think is a great result for the company.

Akum Bega – Bank Equity

Okay, thank you guys, and again congratulations on the great quarter.

Chris Loughlin

Thank you very much.

Operator

Thank you, our next question is from Eric Martinuzzi with Craig Hallum. Your question please.

Eric Martinuzzi – Craig Hallum

Thanks. You guys had a slide last quarter in your slide deck; I refer to it as the Los Angeles slide. It was the one where you sort of laid out in a market where we’ve had Local Deals going for a while, here’s how much the revenue per subscriber on an annualized basis is. You didn’t include that slide in this deck, but I did want to ask a question. Both times, the example of Los Angeles, as well as the other Local Deal markets, that you looked at Q1 versus Q1 a year ago; what was the incremental life in Los Angeles? Did it hold for Q1?

Chris Loughlin

Eric, good to hear from you. If you actually go to slide 14, we just put a summary number in there, and actually the result is even better than the slide somewhat implies, because we say we had $7.80, this is not Los Angeles, but worldwide. $7.80 revenue per subscriber per year, based on the Q1 numbers. That takes the beginning of the year subscriber count, we compare that to Q4, 2010, and that $6.70 is being based off the beginning of the 2010 subscriber count, which is about 2 million subscribers less. Is that correct Wayne? About 2 million, yes?

So in fact, that division is being done off a much lower base, which if you don’t think about that mathematically, productivity gain across the board is significant. The other way you can do it is just take the revenue, annualize it, and then divide it by the number of subscribers, and you can see the gain is significant. So we didn’t feel it was necessary to break down an individual market. Of course, in Los Angeles, yes we’ve had a significant incremental gain, but there also are other markets like London that have done very well as well.

Eric Martinuzzi – Craig Hallum

I was curious, I expected the incremental gain, I was just wondering if the magnitude held as well, where you saw a doubling in Q4, did that sustain in that market in Q1?

Chris Loughlin

I didn’t actually look into that number specifically, because you can now see it on the overall picture, and the reason we disclosed it in the previous quarter is because you couldn’t really see it coming through, but now you can really see it on the overall picture, so we’re not breaking down particular cities, but yeah, it’s significant.

Eric Martinuzzi – Craig Hallum

Okay. As far as attacking the market, the competitive landscape or just the recent activity in Europe versus North America, can you talk about the challenges in Europe versus North America of establishing a footprint?

Chris Loughlin

No, the challenges are actually exactly the same. One is you need excellent leadership, which we have, and then you need to hire outstanding sales people, who understand what a quality deal is. You know, getting a deal, honestly, that deal we outlined on page 17, getting a deal like that which actually comes from a tour operator here on the East Coast called [Septa Tours] and then we work with the hotels too. So Four Seasons, Ritz Carlton, Condé Nast Gold List, you can’t just send in someone who’s graduated from college and never stayed at a luxury hotel to try and get that kind of deal. It’s very, very different to save $5 on a $10 burger lunch. And I think that that’s what we have to understand about what we’re doing here. Getting a Pulitzer Prize in journalism is very different from writing a story in a local newspaper, right? It’s just fundamentally different.

Eric Martinuzzi – Craig Hallum

Okay, but I mean, competitive landscape wise, the household names in North America are Gilt Group, and Groupon, Living Social; are there comparable competitors in Europe, are there other competitors that I haven’t mentioned?

Chris Loughlin

Well, there are local companies everywhere, but while we say they’re competitors, they’re going after business and they have subscribers, it’s a little bit like saying that Expedia is a competitor. It’s not necessarily – we don’t pay much attention to it, to be honest with you. I think we just focus on what we’re doing, and we try to just do the best we can. If we do that, then we win. There is Groupon, Living Social, and [brands of France], there’s lots of companies, there are hundreds and hundreds of these companies, but we just don’t spend time thinking about them, you just focus on what you’re doing. That’s our strategy.

Eric Martinuzzi – Craig Hallum

You guys are having terrific success with this strategy, and I don’t mean to imply you’re not, I just checked because that’s something that can change, and it’s a good chance to check it.

Chris Loughlin

There are different capacities in every market, and every man and his dog is trying to publish Local Deals, but in the end, we’re just focused squarely on what we’re doing, and that’s been our philosophy at Travelzoo for more than a decade. Let’s not forget, there was a period of time when Travelzoo was publishing something called the Travelzoo top 20, and every man and his dog tried to copy that too. We succeeded in the long run, because we just focused on quality, and that’s exactly what we intend to do here. We’re not trying to go and attack the Groupon space or whatever space there might be, we just want to publish deals that are relevant to our subscribers and our audience, and we think that that works.

Eric Martinuzzi – Craig Hallum

Terrific, thank you.

Chris Loughlin

Thank you, Eric.

Operator

Thank you, our next question is from Bill Lennan with Monness, Crespi, Hardt. Your question please.

Bill Lennan – Monness, Crespi, Hardt

Yeah, good morning Chris, good morning Wayne. Chris, you mentioned something that’s been on my mind a lot. With Nino’s, the restaurant in New York, repeat business; I know this is still a relatively young product for you, the Local Deals, but could you give us your thoughts on repeat business? If you have a long term goal, what do you think that might be, and with or without an answer to that one, can you give us two extremes, just some highlights, the people who have expressed a desire to repeat with you the following things, and the people at the other end who say no, once was enough for me.

What are they saying? That’s question number one, question number two, in these instances where you do run into Groupon, Living Social, when are you winning deals and when are you losing deals? What are some of the key attributes of those two scenarios? Thanks.

Chris Loughlin

So hi Bill, good to hear from you. On the repeat, do you mean the businesses, or the subscribers?

Bill Lennan – Monness, Crespi, Hardt

Good question, I mean the businesses. You know, a restaurant coming back for a second or third time, like Nino’s.

Chris Loughlin

Well, the repeat is somewhat limited by the timeframe, right? If we publish Nino’s restaurant, that particular restaurant and he wants to run the same restaurant to the same audience, we probably need to put a delay in there of months. It could be six months; it could even be a year, because you can’t tell people about the same story. That’s just an aspect of managing news, and that’s how we think about it. So it would be perfectly fine for us if Nino’s is working with another deals publisher in the meantime, to service his needs. That’s also how it works with hotels. It’s not like we have a monopoly on hotel deals, and then we would repeat maybe whatever the publishing period is, and we model that. We’ve been modeling that since I’ve been here in 2001. I remember back in 2003, we tested how many weeks in a row we could publish Las Vegas property to Chicago, and we found a point of diminishing returns, so we figured that out. It’s not so much dependent on him; it’s more dependent on us.

And then on the second case, once is enough, we really haven’t run into that problem yet. What we might get is that we send so much volume to a particular business that they just don’t need any help because their capacity is now full for the next period of time, but I can’t imagine that they would say “I’m not going to work with you ever again, anymore.” It’s more a case of they just can’t handle anymore business.

On the second question, sorry. I’ve written a note down but I didn’t get it. What was the second question?

Bill Lennan – Monness, Crespi, Hardt

On those occasions where you have run into Groupon, Living Social, and you’ve won business and flip side you’ve not won the business, what are the key attributes in either scenario? Would you beat them on a deal or –

Chris Loughlin

I don’t – we honestly don’t even – I don’t think we’ve encountered that situation very often. I mean, it’s a massive market out there. This is an enormous market and the chances of both of us speaking to a particular restaurant on a particular day in New York City when Groupon or LivingSocial is speaking at the same time is very, very slim. But what we have encountered, and it’s rather minimal, is where a particular company or a particular restaurant or a particular entity might say, “well, I can go and work with – you’ve never heard the name Daily Deals.com, because this is the local small incumbent, and he’s willing to give me a 10% market and you’re going to charge me x.” then Travelzoo just walks away, because we know the quality of our audience. So I don’t think we’re at a point where we’re going to head to head, it’s a big, big market, there’s plenty of opportunity, we’re focused also on different priorities. Right? And so far, so good.

Bill Lennan – Monness, Crespi, Hardt

Okay, and I have one more. I want to throw one more in there. You talked about being constrained by hiring more people. Travelzoo traditionally hasn’t given out big slugs of equity to employees, and it’s worked very well so far. Do you think over the next two to five years, as you try and get this into big numbers on your deck in Local Deals, if some of the competitors are offering equity slug, is the lack of that policy at Travelzoo going to be a constraint?

Chris Loughlin

No, I don’t think so, not so far. We’re absolutely fine. In the end, it’s either going to be a cost to those companies in terms of recognizing their equity expense, or a cost in cash. We pay in cash, we pay well, and you saw that we hired now Glen and Steve; we don’t have problems hiring great people. In fact, a lot of people also like the fact that their personal performance is immediately rewarded.

Bill Lennan – Monness, Crespi, Hardt

Alright, well thank you.

Chris Loughlin

Thanks very much.

Operator

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

Chris Loughlin

Ladies and Gentlemen, we thank you very much for your support, and we look forward to speaking with you again next quarter. Have a nice day. Thank you very much.

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Source: Travelzoo CEO Discusses Q1 2011 - Earnings Call Transcript
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