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Travelzoo Inc. (NASDAQ:TZOO)

Q2 2011 Earnings Call

July 21, 2011 11:00 AM ET

Executives

Christopher Loughlin – CEO

Glen Ceremony – CFO

Analysts

Frederick Moran – Moran Capital Management

Eric Martinuzzi – Craig-Hallum Capital Group

Edward Woo – Wedbush Securities

Justin Patterson – Morgan Keegan & Co.

Atul Bagga – ThinkEquity

Operator

Good morning, everyone, and welcome to the Travelzoo’s Second Quarter 2011 Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be opened 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.

Christopher Loughlin

Thank you, operator. Good morning, and thank you for joining us today for Travelzoo’s second quarter 2011 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. Before we begin our presentation, we would 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 from those contained in the forward-looking statements materially.

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 release issued earlier this morning, along with the slides that accompany today’s prepared remarks.

An archive 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, I will review our Q2 2011 financial results, and then Chris will provide an update on our strategy. We will then conclude with a question-and-answer session. Now if you will please open our management presentation, which is available at www.travelzoo.com/earnings.

Turning to slide five, we achieved record revenues of $37.6 million in Q2 2011, up 34% on the same period last year. We also achieved EPS of $0.30, up from $0.20 in the same period last year, and we continued our growth in new subscribers, adding approximately 800,000 new subscribers, that’s almost 300,000 more than in Q2 2010.

On slide six, this provides more detail on our operating income. Operating income for the company in Q2 2011 was $7.6 million; $6.5 million came from our North America business, while Europe contributed record profit of $1.1 million and its fourth consecutive quarter of profitability. Our income tax expense was $2.8 million, resulting in net income of $4.9 million.

Turning to slide seven, we look at revenue by segment. Revenue growth in North America was 25%, our highest quarterly growth rate in four years. In Europe, revenue growth accelerated to 67% year-over-year, and in local currency terms, we increased by 53%, ahead of our Q1 pace.

Turning to slide eight, we present our operating income. North America, operating income was stable year-over-year and Europe increased twofold as it continued its profitability. This resulted in operating income of $7.6 million, representing a year-over-year growth rate of 29%, despite a $2 million television advertising test, an investments in Local Deals to future – to fuel future growth.

Slide nine, gives us more insight into operating expenses. Operating expenses in North America increased due to our investments in Local Deals and our $2 million television advertising test.

In Europe, operating expenses increased due to our investment in Local Deals as well. Yet as we scale in Europe, as a percentage of Europe revenues, expenses decreased from a 109% to 84%. So despite our investments in both North America and Europe, because our total revenues increased 34% as a percentage of total revenue, the total operating expenses year-over-year remains stable at 73%.

Slide 10, shows that our head count increased from 296 in Q1 of 2011 to 343 this quarter, our highest ever sequential growth rate in new employees. The majority of our new hires during Q2 were in Local Deals. As you can see our productivity declined as our new staff come up to speed. We are investing for future growth to bring the best deals to our subscribers, and we intend to increase productivity as revenue grows.

Turning to slide 11, we take a look at our cash management, DSOs or day sales outstanding, decreased to 40 days, compared to 41 days in Q1 2011 and improved by five days, when compared to 2010. We ended the quarter with $40.1 million in cash and cash equivalents. This was down from prior quarter as a result of the Q1 2011 one-time $20 million State of Delaware settlement.

As we continue to grow the Local Deals portion of our business, the cash flow increase. As consumers pay us immediately and then we pay the merchants their share at a later day.

We summarize the financial results for the quarter on slide 12. We had a strong quarter with record revenues. The fastest year-over-year growth rate in four years. We had strong year-over-year growth in operating income despite investments in Local Deals and the $2 million television advertising test in the U.S. We also had our second best Q2 ever in terms of subscriber growth.

Now, Chris will cover the second part of our presentation. Travelzoo’s growth strategy.

Christopher Loughlin

Thank you, Glen. On slide 14, I summarize our growth strategy. Along the X-axis, we’re growing the number of subscribers that engage with the Travelzoo brand. We’re accelerating the number of subscribers and introducing new distribution methods including social media, the iPhone, and distribution partnerships with other publishers.

On the Y-axis, we’re growing the revenue per subscriber. Local Deals has become a substantial driver of revenue per subscriber growth. As we turn on new markets and become more productive in existing markets, we see significant incremental revenue per subscriber gains. Other important drivers of revenue per subscriber along the Y-axis include revenues from Fly.com, our flight metasearch business, sales team optimization and time in market.

Turning to slide 15, you can see that we now reached 20.7 million subscribers in Europe and North America. And in Q2, we added approximately 800,000 new subscribers, 300,000 more than the same period last year.

During the quarter, we experimented with new methods to attract new subscribers, including a previously announced television advertising test, social media campaigns, website optimization, deal referral and third-party distribution on websites like the Chicago Tribune and Kayak.com by the Travelzoo network.

One of the most encouraging developments we continue to see is that approximately one-third of customers buying a Travelzoo Local Deal are entirely new subscribers, so as you ramp-up Local Deals, we attract new customers who may not affiliate to use Travelzoo before.

Slide 16 speaks to the Local Deals opportunity and that’s a same slide that I showed you last quarter, but with updated numbers for Q2.

If we start at the top of the chart, you can see that we launched Local Deals just a year ago, when we’ve generated $800,000 in gross revenue. This quarter, we generated $26 million in gross revenue.

As a reminder, this gross revenue is the amount paid to us by customers for the vouchers. We present our revenues on the income statement on a net basis, which is gross revenues, less the share we pay those merchants.

In Q2, our strategy was to quickly extend the service into 27 new markets, well ahead of the 18 per quarter pace of the previous two quarters. By the end of Q2, we’re offering Local Deals in 75 markets across six countries.

You can see that our average deal – deals published per week did not improved significantly compared to Q1 and that’s largely because newer markets still have relatively under developed sales activity. As sales mangers spend more time in markets, we see the productivity increases. Gross revenue per deal remained stable at $33,000 and overall Local Deals is now annualizing at more than a $100 million in gross revenue.

If we look below, we can see the opportunity ahead. Assuming, we penetrated 100 markets and consistently published too high quality deals per week at $30,000 in gross revenue per deal, we would generate $312 million in gross revenues.

If we fast-forward to 200 markets and assume that per deal revenue increases to 37,500 given an audience increase of 50%. We see a business that could generate $750 million in gross revenue. We’re quite excited about the future opportunity with this business.

The Travelzoo, the pace of market launches is restricted only by talent. If we onboard and train talented individuals, who can call on high quality businesses and secure deals, we’re able to secure – we’re able to scale the market relatively quickly.

Moving onto slide 17, you can see how we invested during the quarter to fuel future growth. We’ve ramped up head count at the fastest rate in our history, adding 47 new employees during the quarter mostly within Local Deals. We accelerated the number of new market launches, adding 27 new markets in Q2, compared to 18 in the prior quarters.

We began to rollout Getaways across the world and these are hotel deals that also include the Local Deal, and leverage our new voucher model. We invested a previously announced $2 million television advertising test, and we’ve built a robust customer services and merchant services origination. That included hiring senior executives.

On slide 18, I’d like to share with you one of the biggest wins in the quarter. Travelzoo was selected as the exclusive Local Deals partners for Sysco iCare. Sysco iCare is a marketing organization for Sysco Corporation, the largest foodservices distributor in the United States with approximately 17% market share, and which supplies over 250,000 restaurants.

Travelzoo was selected as the exclusive Local Deals publisher by Sysco iCare because of the quality of our audience and the level of our professionalism. Under the terms of the agreement, Sysco iCare’s – Sysco’s team of 1,000 of sales representatives were now recommend Travelzoo as the go-to-publisher for Local Deals in North America.

To put this opportunity into perspective, you can see here that the initial test deal for Sysco iCare affiliated restaurant, E&O Trading Company in San Francisco generated $130,000 in gross revenue. We look forward to working with Sysco iCare to rollout this exclusive partnership over the coming months and years.

The next slide gives you a sneak preview of Travelzoo’s new iPhone application. We’ve been quite busy in this area. We already see there is approximately 10% of our user base accesses our deals for mobile devices. People for example, go to work, on the West Coast, looking at our deals on their iPhone.

The iPhone is indeed the most popular of these devices, and the first version of the iPhone application allow subscribers and new visitors to access all of our deals and purchase Local Deals. Many of the deals can already be redeemed immediately, as adoption scales, we’ll focus increasingly on addressing our subscribers’ immediate needs with on the go deals.

The U.S. version of the application was uploaded to the iTune store on Monday of this week. And it will be available in the coming days after Apple approves it and then rolled out around the world as localized versions.

Finally, turning to slide 20, I’d like to comment on the essence of our long-term strategy. We fundamentally believe that as we continue to scale, we differentiate ourselves by focusing squarely on quality leadership. We believe that our deals like this dinner at the Four Seasons in San Francisco or the new Palmer House in Chicago stand out from the Marriott of $5 for $10 burger lunches that blue e-mail boxes around the world. We were able to produce such high quality content because we have established a high quality affluent travel ready audience, which is extremely desirable for high quality local businesses.

To conclude the presentation, slide 21 summarizes management’s focus for the remainder of 2011. We will continue to aggressively scale Local Deals in North America and Europe, while keeping our eye squarely focused on quality, and driving efficiency through that business. We’ll continue to grow our subscriber base especially in Europe. We’ll scale – as we scale, we want to improve efficiency in operating margins across the group. We’ll continue to leverage our global content opportunity, plan to bring Fly.com to profitability, and further increase earnings per share. Travelzoo’s consistent practice is not to provide guidance for future periods, because of the dynamics of the industry.

And this concludes our prepared presentation, I’ll now turn back to the operator for the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Thank you. Our first question comes from Fred Moran with Benchmark.

Frederick Moran – Moran Capital Management

Thank you. Chris, the $26.2 million of gross Local Deal revenue, should we assume that the revenue share are take rate dropped meaningfully. And that’s why the revenue came in lower than expectations? Or did the core travel advertising business see no revenue growth in the quarter?

Christopher Loughlin

Hi, Fred. Thank you for your comment. I stated previously, we didn’t set these expectations. We’re not managing towards numbers at the analyst community on the sell-side puts out. We obviously are not completely thrilled with the results, but this is a record quarter for Travelzoo in terms of revenue growth. The take rate for the Local Deals business did not fundamentally change. And as if you look back historically, Q2 versus Q1 for the last five years, you can see that our business, the travel business remains relatively flat. It seems that the sell-side analyst community thought it would grow this year for some reason.

Frederick Moran – Moran Capital Management

Okay. So what is your take rate right now? And what is the reasonable range for that take rate going forward? And why did the core business growth disappear or flatten out in the quarter? And do you suspect that that will be the trend going forward?

Christopher Loughlin

Well, as I just stated, if you look at the last five years, the operating of our business tends to be flat from Q1 to Q2. And I don’t know why a number of analysts would think otherwise. So that’s the first thing. The second thing is, as I previously stated, our take rate ranges from 30% to 40% and that hasn’t changed at all in the quarter.

One thing, which we did this quarter as you can see we launched product called Getaways, which we tested in March. That did create a little bit of cannibalization and confusion, where it moved and moved hotel revenue from advertising to a voucher model. But I think that was a smart idea, because what we see for example we ran a Berlin hotel, typically a Berlin hotel might spend somewhere in the region of $5,000 to $10,000 in advertising fee. But with one simple promotion that Berlin hotel generated somewhere in the region of € 30,000, €40,000 for the company.

And indeed the hotel also got more business because we had an incentive to deliver the media to a larger audience. So I mean, look we are quite – we are doing a lot of things here, I would say, and we’ve got a lot of businesses. I would say that the Local Deals business was very good. And the other businesses were somewhat as expected. But there were certainly some areas where we can improve particularly in the hotel area.

Frederick Moran – Moran Capital Management

Would you consider breaking out segment results for the core versus the local going forward, so that we could better model that core business on an ongoing basis?

Christopher Loughlin

We are not doing that at this time, but I’ve been...

Frederick Moran – Moran Capital Management

Okay. Is the $19 million of sales and marketing expenses in the second quarter, a new sustainable level or should we adjust downward the $2 million one-time test advertising?

Christopher Loughlin

We tested advertising. We clearly stated it was a test. We issued a press release that there was a test. And again I reiterated that those are tests. So if we announce – if we plan to run any further television advertising of that scale, we would obviously announce in a press release that we will run television advertising. This time I don’t have any plans to run any television advertising.

Frederick Moran – Moran Capital Management

Okay. Final question, it looks like some of the larger older Local Deals markets saw some flattening out of growth in the quarter, was that due to competition, saturation, maturity will that impact the take rate, and can Travelzoo truly differentiate and compete and grow in those largest markets going forward?

Christopher Loughlin

I am not aware of any decline. So I think, the problem you’ve got there is, I – first of all, I don’t know where you’re getting your data, because we are not disclosing the data.

Secondly, if, for example, we offer a deal, and then there is an up-sell, I mean, for example the very first deal on the site right now, it says the price is $149 for a stay in Connecticut close to hotel, but then there’s a $179 or $239 or $299 option, and you have no visibility at all on what people are buying. So I really don’t know where you’re getting your numbers from. But you can’t have the numbers that I have.

Frederick Moran – Moran Capital Management

Okay. So – and do you – you believe that your largest markets are still growing rapidly on a sequential basis and you’ll be able to order – offer more deals in those markets and continue to grow it meaningfully?

Christopher Loughlin

Yes. I mean, why wouldn’t we be able to grow – continue to grow. We demonstrated again and again and again for the last 12 years we can continue to grow our audience. On the one hand, we continue to grow the audience and on the other hand, we can also segment the market.

If you look at Los Angeles, that’s actually five markets for us, I’m sitting in the Bay Area right now, and we really only treat the Bay Area as two or three regions where you could treat as more, I mean, so as you get more granular – your conversation rate may indeed go up on those deals and you can become more productive. But in the end, Fred, it’s all about execution. And we have to do a better job in execution. This quarter was about laying the foundations. We brought a lot of people on board, obviously those people were not be as productive as the people who’ve been here for long time. And so that’s of course our intention.

Frederick Moran – Moran Capital Management

Thank you, Chris. I appreciate your answers.

Christopher Loughlin

Thank you.

Operator

Our next question comes from Eric Martinuzzi of Craig-Hallum.

Eric Martinuzzi – Craig-Hallum Capital Group

Hey, yeah, congratulations on the real strong growth there. My question is again, on the North American travel. I know you guys don’t report it this way, but maybe a better way to ask the question would be to, for somebody like me who models four different segments, so I’ve got you know travel and local, North America and Europe. Would it be correct to say that, if I saw a down year-on-year North American travel that the air in my model would be this Getaways would that be the likely explanation?

Christopher Loughlin

Yeah, I think, I think that’s actually a reasonably good assumption, I mean obviously it’s not the whole picture, but we took a decision back in April. We ran a test in April – actually ran a test in March for the Getaways. And some folks will probably remember there was a Napa Valley deal that all of sudden went through the roof. And we just said to ourselves, okay, do we attack ourselves, or do we just ignore this, and what we did is that right, let’s roll it out, see what happens.

You noticed that the content is quite different, so hotel direct is strain to the hotel’s booking engine. And what we find is the large corporations to have best price guarantees, and want you would manage a very interested and continue to get that direct business. And then there was smaller – smaller hotels and properties quite keen to get either via the voucher, or via the booking engine.

So we started to rollout this quarter, and, we have more than 30 people around the world focused on hotels. So as you’re trying to disseminate a new product after new, you create some cannibalization on the one hand, you create a little bit of confusion, and then you get back up to speed, so that’s in fact what happened, Eric, and I’m confident that we can really get that thing moving again.

Eric Martinuzzi – Craig-Hallum Capital Group

So is it fair to say then for your top 20 e-mail, newsletter that the incursion rates have not seen a decline?

Christopher Loughlin

I really didn’t look into that level of detail in the top 20s yet. But, I mean, one thing which is interesting when you run an advertising deal, of course, you can recognize and you know the revenue upfront immediately, when you run a Getaway, you don’t know what happen until next week. Right? So I mean that – and do you then say, okay I am willing to replace the hotel advertising solution with this Getaway solution for a particular spa in the top 20. You honestly don’t know the answer until the week from the day you do it. So we’re still early days on that. But I mean, I am encouraged certainly by the results and the feedback we’re getting from the users on the Getaways.

Eric Martinuzzi – Craig-Hallum Capital Group

Okay. And last question for me, you had an acceleration in the number of new markets that you went after in Q2. My own model, I was building on around 18 per quarter, you had 27 in Q2. Do you have any expectation for Q3 or could you – for those us modeling at home? Where you expect to end up for year end? Is this back to 18 for Q3? Is it same as Q2 any help would be appreciated.

Christopher Loughlin

Well, what we said at the beginning of the year is that – ideally I would be great if we get into 100 markets. That would be fantastic. The – we had a big debate internally, do we go hard and wide now or do we go deep, and we went wide, and we brought on lot of new folks. And the benefit of doing that is that you can train a lot of people up at the same time rather than bringing onesies, twosies at the time. And we’re now starting to see that. If you look at Detroit, that’s a new market, actually we are very excited about Detroit. What’s nice about market like Detroit is, on the one hand you’ve got the Local Deals, but you don’t really have too many travel deals going in newsflash. And so the media saturation or demand for the media is not necessary as great as it is in the New York City or Los Angeles. And so these markets like Detroit where we have a large group of subscribers can be very, very attractive for us.

The goal now is obviously to improve the efficiency that we have in the business, improves the conversion rate and so forth, and that comes from spending. I mean literally you need to spend day at a time with the folks and help them develop and understand the business very quickly.

And the other hand, as you point out, I told at the end of the presentation about the quality of the deals that we’re putting out there. When you’re working with the Four Seasons or when you’re trying to get the Sysco iCare deal closed, it’s very different to going and getting 50% of happy hour to local pub or half of burger lunch.

I could publish those kinds of deals. I could publish 100 markets of those kinds of deals tomorrow. But that’s not the direction we want to take this company. We want to stay focus squarely on quality and right at the top of the spectrum, and it might be a little bit more difficult in the beginning, but we think that’s going to pay-off in the long run.

Glen Ceremony

Okay. So just to summarize, 100 is still to go by year-end. I’d certainly appreciate the differentiation in your subscriber demographics. But I just wanted to put a fine point on it. It was a kind of a batching of hiring in April, but still a goal for 100 – terrific by year end.

Christopher Loughlin

Yeah, those people who are monitoring the results of the Local Deals, because often we see data coming on saying this is what Travelzoo is doing and so forth and – we are interested – we don’t even know where you are guy are getting the information from. But it is true that April was slower, that was an intense period of hiring and developing, and June was much stronger. And I mean, it seems – the analyst community picked up on that. We need to capitalize on this now.

Eric Martinuzzi – Craig-Hallum Capital Group

Thank you.

Christopher Loughlin

Thank you.

Operator

Our next question comes from Ed Woo from Wedbush.

Edward Woo – Wedbush Securities

Congratulations on the growth, guys. But I think some of the investors are concerned with the core market. I know, you don’t break out Local Deals in core revenue, but my rough estimates for Europe shows that revenues were down sequentially, could you comment a little bit about how the Europe growth outlook is going forward either in core or Local Deals?

Glen Ceremony

Ed, we don’t break out the – we don’t break out the two businesses in – on often times. Honestly, we think about it as one business. I mean, you think about what do you do, do you send out the newsflash for British Airways, or do you send out the Local Deals for Gordon Ramsay. And these are decisions that happen within the business.

We are not concerned about the growth rate within the European business. Some markets are growing phenomenally well. Some businesses have seasonal fluctuation. The point in the business is – it’s about you bringing on all these people, introducing new products, I mean, let’s think about what we did in the last six months. We took Local Deals across Europe. We put it into all of these different countries. We build teams around that. We integrate into new business. We also launched Getaways and there is a lot going on and that consumes a lot of time.

So we’re of course not happy with the growth rate. I mean, even though it is our record growth rate, we would like it to be even stronger than that. But it’s honestly about execution and that’s it. There is no other ingredient. It’s simply execution.

Edward Woo – Wedbush Securities

When you say you’re happy, or I’m not sure about the growth rate, is it for Europe in general or do you have specific answers for each specific region?

Glen Ceremony

Well, no I mean, that’s a phenomenal growth rate you are seeing there in Europe, in local currency it’s over 50% and in dollars it’s over 50% So I mean, it’s a great – it’s a tremendous growth rate. So first quarter we’ve surpassed $10 million in revenue in Europe and the business is throwing off over a $1 million in profit now.

So – but could we do better? Yes, of course we could do better. How do we do better? It’s not necessary a market issue. It’s simply that we need to get more focused and we need to digest this new business and then pick up the pace again. So I mean, that’s the reality of what’s going on.

Edward Woo – Wedbush Securities

Previously you said that once you get to a million subscribers in a certain country that you begin to really see accelerations in revenue and profitability? Is that still the case?

Glen Ceremony

Well, it was 1% and so it’s – when I was building the U.K. business, 1% of the audience people start to take you, 1% of the population people start to take you somewhat seriously, 2%, 3% until 4%. In a market like Canada we are very strong there approximately 6% or 7% of the adult population use Travelzoo. So yeah, of course the stronger the market, it wasn’t a million, it was only, I think in that conversation, I think it was a million in relation to that particular market. And for example in Canada a million, a million two subscribers gets you 6% or 7% of the adult population. So that of course does help you take a dominant market position.

Edward Woo – Wedbush Securities

Great. Then the other question is, you made a lot of investment. You hired a lot of people, I mean, you’d run that TV campaign. When do you think you’re going to start to see leverage from that, is it what the subscriber growth, is it immediately that you should start charging for higher ad rates or does it take a little bit of cycle time to start to shop in the ad rates that you charged advertisers?

Glen Ceremony

Well, I mean you introduced new higher ad rates at a point one is when the market can digest it, that’s one. And two when you have a significant increase in subscriber growth so for example in the market like Spain, we did put in a rate increase that obviously that was put in probably in January, which we benefit from now. And there is obviously a lag of three months or so before you get all advertisers on to the new rate.

In the U.K., I think there was also a rate increase because I mean the U.K. now with the sixth largest travel brand in terms of traffic and we have over 2.5 million subscribers. So advertisers are willing to pay for that opportunity as well. So that’s the benefit, there is of course a stepping approach on media, you can’t increase your rates every day. On Local Deals and also on our variable products so for example Fly.com we can obviously benefit immediately from increases in subscriber base or audience size.

Edward Woo – Wedbush Securities

Great, well. Definitely, good luck.

Glen Ceremony

Thanks Ed.

Operator

Our next question comes from Justin Patterson with Morgan Keegan.

Justin Patterson – Morgan Keegan & Co.

Thank you very much for taking my questions. The first I would want to dive in to, just kind of deals on that Local Deals tracking piece. I think the way that we are all monitoring that, it’s just by tracking a website on a daily basis and making an assumption just off of the voucher sold times the face value and then taking our take rate, doing that you do see somewhat of the softening in some of your core markets like Los Angeles. Is there anything fundamentally wrong with doing that approach to tracking Local Deals? Are we incorrect to assume that’s a valid indicator of the business?

Christopher Loughlin

I think it’s an indicator, but you don’t know, for example, how many subscribers received a specific offer. So you might say, “Well, that deal – that restaurant deal, they generated 3,000 vouchers”. And then, we run the same deal six months late and say, “Well, that deal and you generated now 800 vouchers “Oh my gosh, must – something must be wrong?” But it simply could be the first deal we sent to 600,000 people and the second deal, we sent to 30,000 people and that’s what you don’t know.

The other thing you don’t know is, when we put up-sells and no cross-sells, you don’t know whether the – whether there was an up-sell or cross-sell. And I think, you just need to think about that when you are taking these numbers. I see numbers coming out during the quarter and I honestly have no idea where they are coming from, because we didn’t supply the numbers.

Justin Patterson – Morgan Keegan & Co.

All right. Yeah. That’s just been kind of a general trend for estimation. So thank you for that clarification on the inability to capture the cross-sell part. Now, you did mention that you were seeing that roughly one-third of our new Local Deal or Local Deals customers are becoming new to Travelzoo. Does that kind of over time help you, I guess, cross-sell more on the deals front. And, I guess, are the demographics here kind of comparable to what the existing Travelzoo customers like?

Christopher Loughlin

We don’t – we haven’t analyzed fully the demographic yet. That’s the first thing. We haven’t – we really haven’t looked into whether these people are then buying Travel, we will look into that but it’s not something we’re focused on right now. But you have to understand, our deals are – our Local Deals are already relatively expensive. It’s the – it’s $100 dinner for two at the Four Seasons or even these Getaways can be priced at more than $199. So I would think that the demographic is somewhat similar and certainly the feedbacks from the restaurants and so forth, they do praise the customers – its now, we not had a situation where somebody is caught up, says your customers were awful, that certainly has nothing yet

Justin Patterson – Morgan Keegan & Co.

Got it. So when we look at some of the other providers that are actually kind of deemphasizing restaurants to some extent, the reason you are succeeding is more a function of deal structure and your customer base?

Christopher Loughlin

I think – well it’s not, some of the other guys will literally do two for one, two for one, two for one and ours and we look at our Four Seasons deal, it’s an experience, it’s holistic experience and it’s not a two for one. And what – we do that in travel and we have done that in travel for the last decade, where we will consult and say how can we make this really an engaging experience.

And I think that’s quite different. We really think that this business like publishers and the other interesting about publishing is the content itself attracts a certain demographic of audience. So if we are publishing Four Seasons, Tennessee and San Francisco that’s going to attract a certain type of person versus the $5 for $10 burger lunch.

Justin Patterson – Morgan Keegan & Co.

Got it. Turning to head count, obviously a lot of adds this quarter, can you comment on kind of the linearity or was that more toward the beginning of the quarter or end of the quarter, so when we are thinking kind of, I guess next quarter out, so we expect kind of a another bump up after normalizing for TV expense in there?

And secondly, on head count, how quickly should we get to the kind of normal productivity or historic productivity levels with this recent batch of people, it sounded like that there is, well there is obviously some cycle time in terms of getting everybody up to kind of your desired level there?

Christopher Loughlin

Glen – I will give Glen a chance here to speak and answer that question.

Glen Ceremony

I think the hiring for the quarter was fairly even throughout the quarter. Don’t forget that we’ve been on around for several quarters, right. And including the impact of just trying to get those people trained up, the things that Chris talked about as far as focused on quality and the types of deals we are doing, that’s not a situation to where you can get a sales person in and send him out on the street the same day, right. We have to make sure they are trained up properly and so you are probably looking at a five to six-week period making sure they are focused on that.

Christopher Loughlin

And just – and that does also depend on the person. If he has a star, you could go faster. If it’s a person who is not a star then it might take a little longer to help them understand the brand and have confidence I mean walking into the Ritz-Carlton or Four Seasons and getting a deal. I mean you got to have quite some confidence to do that.

Justin Patterson – Morgan Keegan & Co.

Right. I appreciate that side. So perhaps a better way to phrase the question would be as I guess you kind of move from your tier one markets into tier two, tier three since you’ve kind of hit all the big cities of this client. How do you see kind of those new markets tracking kind of a comparable time basis versus some of your larger more successful markets at those points in time as well?

Christopher Loughlin

Well, I think as it depends – the rest two cases, I can think off the top of my head is, first of all look at Toronto, I think we put a press release now about Toronto. We’ve something in the region of 160,000 subscribers and then the first two deals sold something like 3,000 bucks each and that’s a phenomenal market that just keeps going for – especially it was Vancouver, not Toronto, sorry, it was Vancouver and Toronto is the same. But I mentioned Detroit earlier in the call, that’s a new market for us and look at the results there.

So I think again it all goes back to the quality of the content that we publish. Ultimately, will determine the results. We have the audience and the Tier 2 markets in some cases maybe much more attractive for Local Deals than some of the Tier 1 markets because of the level of media saturation.

Justin Patterson – Morgan Keegan & Co.

Got it. Thank you very much.

Christopher Loughlin

Thank you.

Operator

Our next question comes from Atul Bagga with ThinkEquity.

Atul Bagga – ThinkEquity

Hey, guys. Thanks for taking my questions. Couple of questions for you. Chris, you touched upon a little bit on the cannibalization between the Getaways product you have for the Local Deals side and the hotel business or your core business. And you shared some metrics around how you have been able to uplift that – your merchant spend on – with you guys.

Can you give us some sense how big is that segment for Travelzoo. I’m not sure if you can be very granular, but even if you can give some directional inputs on how big that market is for the core business and how should we see this overall business growing from this segment in the next 6 to 12 months?

Christopher Loughlin

Well, I mean needless to say it’s a substantial part of our business the hotel business. And these product Getaways, I mean we’ve run less than 200 Getaways so far.

So I mean it’s really quite early still what we see it seems to work very, very well for the local drive market and that’s a need we haven’t really serviced in the past. So to some degree, there is cannibalization, but also the traditional Travelzoo business is about getting you to fly from San Francisco to New York and stay in a hotel. But what we’re not going to do Getaways to send the person sitting in San Francisco and Getaway to New York, certainly not yet. So that’s why there is no cannibalization. Hopefully that sort of gives you an answer to the question.

Atul Bagga – ThinkEquity

Okay. And Getaway is your revenue share – is it roughly expand that you see for other lifestyle businesses?

Christopher Loughlin

Yes.

Atul Bagga – ThinkEquity

Okay. That makes sense. And I don’t know if you can share anymore granularity on growth revenue between North America and Europe. Can you talk about that?

Christopher Loughlin

Sorry, what was the question?

Atul Bagga – ThinkEquity

Growth revenue between – from Local Deals between North America and Europe?

Christopher Loughlin

We don’t break that out at this time.

Atul Bagga – ThinkEquity

Okay. I have two more questions. One on your TV campaigns. Can you talk about, how do you measure that effectiveness of this TV campaigns? What are the metrics you might be looking out for next, let’s say, two, three months? Is it the subscriber growth, is it Local Deals sourcing? Where do you see the impact of the TV campaign and...

Christopher Loughlin

Well, so where you did see that as we added 300,000 more subscribers than in the prior year quarter. So – the – some of that obviously has related to the TV campaign. But we did see was – and it’s a more antidotal again when our sales team are walking into advertisers or into local businesses those folks have seen the TV ad. TV ad made even – have been playing on the TV when they walked in or even just to mention the fact that we have a TV ad, adds credibility.

So that – those are some sort of the benefits of running the TV ad. We obviously would like to see listing subscribers. I don’t think we really saw less to the extent we would have like to. From that commercial, I think it should be more the creative and how we purchased the media rather than the fact – rather than the fact that you know, we were – the TV in general doesn’t work. So in general, it was positive and getting the word out of our Travelzoo. If you actually look at our Facebook site, there were new users who came and said I didn’t know about this site before, it’s great. But I saw your TV ad on the cooking network or something like that.

Atul Bagga – ThinkEquity

Okay. And the last one, can you talk a little bit about longer term how do you see this deal space, the Local Deal market trending. I mean, do you expect next 12 to 18 months given a number of new competition coming in the space with Facebook, with Google, with American Express and do you expect your revenue share or the margins remaining same or do you think you guys might have to invest more in terms of marketing or sustaining the subscriber base and also in terms of your revenue share?

And the last on – in terms of when you are talking about two deals per week per market, what is that timeframe, is this something that you are looking for next two years, three years?

Christopher Loughlin

Well, I mean it’s not something we put a timeframe on, but of course, we’d like to do that as soon as possible. In the end, I’ve said this before, the natural limitation on the business for every player is 365 days of the year. That’s a natural limitation and that’s not so much that I have to worry about the competition. It’s more that I have to think about that.

And then the second thing is thinking about the quality. In publishing, there is a spectrum of quality. There is the Wal-Mart Coupon Book and then there is the New York Times and Wall Street Journal. And we’re operating up at the level of the New York Times and Wall Street Journal in terms of content quality and we believe that that’s a market that we can compete in. But the only major threat there is indeed our own ability to execute, and it’s not so much to think about the other guys.

As a consumer, consumers will choose, which content is right for them, and given the most publishers can only send one message a day. It’s not going to be that every single business in a particular city will run in every single publication every single day. I mean, it’s just not realistic.

Atul Bagga – ThinkEquity

Actually, if I can squeeze one more, on this mobile app that you guys are launching. What is the kind of – what is your expectation from mobile app, where do you see, what metrics you would expect to see improvement from mobile in the next three, six months?

Christopher Loughlin

Well, approximately 10% of our traffic comes from mobile devices today. So the first base is simply to service the need. We also, obviously are in the local space, so you can – on the mobile approximately, you can just type in your zip code or in fact you can hit button says Deals and Me and immediately we can show you deals that are available for you. And the idea is that you could be in New York, you want to have lunch. We can find you a deal immediately for lunch. Most of our deals are already redeemable immediately or if the landing an airport in London tomorrow, probably, we could find a hotel for you too. So it’s simply – it’s changing consumer behavior and we’re adapting as well.

Atul Bagga – ThinkEquity

On your mobile app, the screenshot that you have – it seems like there is some Twitter integration. Are you guys also doing, working something with Facebook as well?

Christopher Loughlin

No. We haven’t. I mean, we have well over 100, I think around the world over 150,000 fans on Facebook. People like to share our content all the time and they like to use those mechanisms, so we obviously are just providing link to that.

Atul Bagga – ThinkEquity

Okay. Thank you.

Christopher Loughlin

Okay. Thank you.

Operator

Okay. I’ll turn back now to Mr. Loughlin.

Christopher Loughlin

Thank you, operator. So ladies and gentlemen, we thank you for your support and look forward to speaking with you again next quarter. Have a nice day.

Operator

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

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