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Travelzoo Inc. (NASDAQ:TZOO)

Q1 2007 Earnings Call

April 24, 2007 5:00 pm ET

Executives

Ralph Bartel - Chairman of the Board, President, Chief Executive Officer

Wayne Lee - Chief Financial Officer

Holger Bartel - Executive Vice President, Director

Analysts

Michael Millman - Soleil Securities

Melinda Davies - Susquehanna

Presentation

Operator

Good afternoon everyone and welcome to the Travelzoo first quarter 2007 financial results conference call. (Operator Instructions) Now, it is my pleasure to turn the floor over to your host, Ralph Bartel, Travelzoo's Chairman and Chief Executive Officer. Sir, you may begin.

Ralph Bartel

Thank you, Operator. Good afternoon and thank you all for joining us today for Travelzoo's first quarter 2007 financial results conference call. I am Ralph Bartel, Chairman and Chief Executive Officer. With me today is Wayne Lee, the company’s Chief Financial Officer, and Holger Bartel, Executive Vice President.

Wayne Lee

Hello, everyone. Welcome to our conference call.

Holger Bartel

Good afternoon, everyone.

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Ralph Bartel

Before we begin, I would like to walk you through today’s format. First, we will discuss the company’s first quarter 2007 financial results. Then we will provide additional information on the company’s growth in subscribers and growth strategy. We will then conclude with a question-and-answer session.

Before we discuss the company’s financial results released earlier today, I would like to remind you that all statements made during this conference call that are not statements of historical fact 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.

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.

Today, Travelzoo announced its 35th consecutive quarter of growth in online advertising sales. Diluted earnings per share for Q1 2007 were $0.25, up from $0.24 in the prior year period.

Our revenue increased to $19.7 million in Q1 2007, an increase of 17% over revenue of $16.9 million in the same period last year. The quarterly sequential revenue increase from Q4 2006 to Q1 2007 was 12%. All of our publications and products, which provide latest and reliable information on the very best travel offers from more than 600 travel companies, contributed to the year-over-year growth.

Our publications and products include the Travelzoo website and Travelzoo Top 20 newsletters in the U.S., Canada, U.K. and Germany, and Newsflash and Super Search, our travel search engine.

Our North America business segment revenue in Q1 2007 was $18.5 million, an increase of $2.1 million year over year. Our Europe business segment revenue in Q1 2007 was $1.3 million, a $723,000 increase year over year.

In terms of revenue concentration, Travelzoo had one group of advertisers under common control that accounted for 14% of revenues and another group of advertisers under common control that accounted for 12% of revenues in Q1 2007. No other group of advertisers accounted for 10% or more of revenues.

Travelzoo's operating income in Q1 2007 was $7.5 million, an increase of 7% compared to Q1 2006 operating income of $7 million. Operating margin in Q1 2007 was 37.9%, down from 41.1% in Q1 2006.

Travelzoo's net income in Q1 2007 was $4.1 million, essentially flat compared to Q1 2006 net income. Reported net income was impacted by an increase in our effective income tax rate.

Travelzoo's effective income tax rate in Q1 2007 was 48.2% compared to 43.6% in Q1 2006. The increase in our effective tax rate compared to Q1 2006 was due primarily to the increase in the loss from our Europe business segment and our operations in Canada.

For financial reporting purposes, the losses from our Europe business segment and operations in Canada and the cash program expenses were treated as having no recognizable tax benefit.

Cash flow from operations in Q1 2007 were $6.6 million.

DSOs, that is days sales outstanding, as of March 31, 2007, was 45 days, up from 41 days as of December 31, 2006.

Total cash, cash equivalents and short-term investments as of March 31, 2007 increased to $39.9 million from $33.4 million as of December 31, 2006, due primarily to the cash generated from operations.

I will turn now to Wayne to discuss additional information for our two business segments, North America and Europe, including headcount, expenses and operating income.

Wayne Lee

Thank you, Ralph. We believe that Travelzoo continues to be a highly productive company. We had 94 employees as of March 31, 2007. 75 of these employees were in North America and 19 employees were in Europe.

Average annualized revenue per employee in Q1 2007 was $840,000, down from $996,000 in the same period last year.

Let’s now look at the expense line items of our two business segments. In North America, our largest expense item continues to be sales and marketing, consisting primarily of advertising and promotional expenses, and salary expenses associated with sales and marketing staff.

Total sales and marketing expenses were $7.9 million, up from $6.5 million in both Q1 2006 and Q4 2006. Sales and marketing expenses as a percentage of revenue increased to 42.5% in Q1 2007, from 39.3% in Q1 2006.

The increase from Q1 2006 was primarily due to increased salary expenses associated with sales and marketing staff, increased spending on marketing for Super Search, and increased spending on brand marketing campaigns.

The increase from Q4 2006 was primarily due to a $1.3 million increase in spending on subscriber acquisition campaigns and increased salary expenses associated with sales and marketing staff, offset by decreased spending on marketing for Super Search.

In North America, general and administrative expenses were $2.1 million in Q1 2007, down from $2.3 million in Q1 2006 and up from $1.9 million in Q4 2006. The $200,000 decrease in general and administrative expenses versus last year was due primarily to a decrease in bad debt expense, while the $200,000 increase from Q4 2006 was due primarily to an increase in legal and professional services expenses.

North America operating income for Q1 2007 was $8.2 million, up from $7.4 million for the same period last year.

Operating margin for Q1 2007 was 44.1%, compared to 45.2% for the same period last year.

In Europe, our largest expense item also continues to be sales and marketing, consisting primarily of advertising and promotional expenses and salary expenses associated with sales and marketing staff.

Total sales and marketing expenses in Q1 2007 were $1.5 million, up from $638,000 in Q1 2006 and up from $800,000 in Q4 2006. The $820,000 increase from Q1 2006 was due primarily to increased spending on subscriber acquisition campaigns, increased spending on search advertising, and increased salary expenses associated with sales and marketing staff. The $658,000 increase from Q4 2006 was due primarily to increased spending on subscriber acquisition campaigns and increased spending on search advertising.

In Europe, total general and administrative expenses in Q1 2007 were $469,000, up from $337,000 in Q1 2006 and down slightly from $496,000 in Q4 2006. The $132,000 increase in general and administrative expenses versus last year was due primarily to increases in office expenses and salary expenses.

Our Europe business segment incurred an operating loss of $683,000 in Q1 2007, compared to an operating loss of $460,000 in Q1 2006. Though revenue increased by $723,000, the operating loss increased as both sales and marketing and general and administrative expenses increased.

This concludes our discussion of Travelzoo's Q1 2007 financial results. We will turn back now to Ralph who will provide more information on the growth of our reach and our growth strategy.

Ralph Bartel

Thank you, Wayne. During Q1 2007, Travelzoo added a total of 889,000 new subscribers to its e-mail publications. In North America, we acquired 737,000 subscribers at an average cost of $2.61 per subscriber in Q1 2007, compared to 374,000 at an average cost of $1.56 in Q4 2006.

In North America, Travelzoo's Top 20 newsletter and Newsflash e-mail alert service had a net unduplicated total of 10.6 million subscribers as of March 31, 2007. This represents an increase of 9% versus the same time last year, while revenues increased 13% year over year. Management believes that this shows that Travelzoo is able to successfully generate higher revenues as our reach continues to increase.

In Europe, we acquired 159,000 subscribers at an average cost of $3.89 per subscriber in Q1 2007, compared to 69,000 subscribers at an average cost of $2.94 in Q4 2006.

In Europe, Travelzoo's Top 20 newsletter and Newsflash e-mail alert service had a net unduplicated total of 783,000 subscribers as of March 31, 2007.

In 2005, Travelzoo began its growth strategy of expanding into selected international markets. So far, we are very pleased with this strategy. We see a competitive advantage from being able to cross-sell advertising internationally. For example, our sales force in the U.S. now sells inclusions for our U.K. and Canadian publications, while our sales force in Europe also sells inclusions for our U.S. and Canadian publications.

Another competitive advantage is our improved ability to source the very best travel deals and perform a very high quality review by leveraging the specific knowledge and expertise of our producers in offices in five countries and nine cities: Chicago, Las Vegas, London, Miami, Mountain View, Munich, New York, Paris, and Toronto.

This concludes the discussion of financial results, the growth in subscribers, and our growth strategy.

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

Question-and-Answer Session

Operator

(Operator Instructions)

We will take our first question from Michael Millman with Soleil Securities.

Michael Millman - Soleil Securities

Thank you, a couple of questions; could you talk about, from the rate of growth from advertisers, or compare the rate of growth from advertisers for air, for hotels, for cruises, for car rental?

Ralph Bartel

Hello, Michael. Holger will take this question.

Holger Bartel

Hi, Michael. We do not break out what revenue exactly we generate from each of these categories and we also do not want to disclose for competitive reasons what the growth is in each of these categories.

However, we are very pleased overall with the growth that we have seen in North America. In North America, revenue growth has been 13% year over year, Q1 2007 versus Q1 2006. This was a growth of 13% but you have to keep in mind that the rate increases we instituted in Q1 2007 versus last year were only 6%, so across the rate cut, if we take a straight average, we increased rates by 6%. Now, you wonder what determines by what percentage we increase the rates, it depends on competitive offerings, it depends on sell-out rates, general advertising landscape, the subscriber base, demand for specific products, and we are also trying to diversify our customer base.

So in areas where we see a lot of demand, so if we see a lot of demand in certain areas, for example hotels or cruises, we are more inclined to increase rates. In fact in some areas, we increased rates by up to 40% in other areas. Where we wanted to increase the business we are generating, we kept rates constant.

Michael Millman - Soleil Securities

So I guess you employ yield management. Maybe you could, without giving specifics, you could rank what the growth has been? Which of the areas has grown fastest, which slowest?

Holger Bartel

Well, the growth has obviously been fastest in Europe and in Canada, in our new markets. Not so much in North America, but as I said, we do not break it out specifically by advertiser category.

Michael Millman - Soleil Securities

Could you also talk about what we are seeing some of the travel companies are trying to boost their advertising revenue, and it is starting to take these kinds of ads, I guess Expedia for one. Could you talk about that competition, what your strategy is to combat it and to what extent it may have changed the growth going forward in the industry?

Holger Bartel

I am not sure I really understand your question. There have always been competitors in the market who are trying to imitate what we do. We have seen that now for years. We hear from our advertisers that they are not providing them results, the results that we are providing our advertising clients. Certainly I do not comment on specific advertisers and what we are doing with them.

Michael Millman - Soleil Securities

Thank you.

Ralph Bartel

Thank you, Michael.

Operator

(Operator Instructions)

We will go to Melinda Davies with Susquehanna.

Melinda Davies - Susquehanna

Hi, good afternoon.

Ralph Bartel

Good afternoon, Melinda.

Melinda Davies - Susquehanna

I wanted to ask if you could first of all explain if there is anything irregular we should be looking at in terms of the increase that you saw in your accounts payable and income tax payable this quarter?

Also, how are you guys doing with your non-travel best deals product?

Ralph Bartel

Melinda, Wayne will answer your question about the accounts payable.

Wayne Lee

Yes, hi, Melinda. The changes that you see in both our accounts payable and our income taxes, those are just timing differences. There is nothing unusual.

Melinda Davies - Susquehanna

Okay, so you are not trying to do anything different with your target of working capital?

Wayne Lee

No.

Ralph Bartel

Melinda, you asked about new products and although we do not specifically comment on new products when we launch them, what our strategy is, obviously for competitive reasons, but we have exciting products in development and Holger will provide more information on this.

Holger Bartel

Hi, Melinda; just to give you an example of a few of the product developments we are working on in North America and that we are very excited about, first, for example, we talked about this before, events and show tickets. We started promoting in Q1 deals for show tickets. We had a couple of offers for Las Vegas and New York shows, and saw very good results with that. Our subscribers responded very favorably to these deals. Our advertisers were pleased with the results they are getting from our over 10 million subscribers that we now have in North America, so we are going to continue building out that business throughout the rest of the year.

A second area is video content. You might have seen on our website this quarter that we are increasing and producing videos. We see this as an opportunity to differentiate pricing for our advertisers. In fact, we have started selling video add-ons for companies that want to promote their brand, want to promote their services, want to show what their hotel or resort looks like. It is an area that we think will help us generate more business from our advertisers.

Another third area is partnerships with promoting our deals, the deals that our producers come up with and work with with our advertisers to promote these offers on other websites, particularly in geographically targeted ways.

We started launching some of these tests at the end of Q1. We were hoping to move forward a bit more quickly. It takes a few weeks longer to integrate that on our partners’ websites, but this is also an area that we are very excited about.

Ralph Bartel

You also asked about taxes, Melinda, and Wayne will provide some more information on this.

Wayne Lee

So even though our income before income taxes increased by $539,000, we had a $600,000 increase in our income tax expense, and this is due one, having higher taxable income, but two, due to the higher effective tax rate that we had in Q1 --

Melinda Davies - Susquehanna

My question was actually about the income tax payable. I just wanted to make sure that that was the reason behind that.

Wayne Lee

I see. Okay.

Melinda Davies - Susquehanna

Thanks.

Ralph Bartel

Thank you, Melinda.

Operator

I will turn the conference back to Mr. Bartel.

Ralph Bartel

Ladies and gentlemen, we thank you for your support. We 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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