Travelzoo's (TZOO) CEO Holger Bartel on Q1 2016 Results - Earnings Call Transcript

| About: Travelzoo Inc (TZOO)

Travelzoo, Inc. (NASDAQ:TZOO)

Q1 2016 Earnings Conference Call

April 28, 2016 11:00 AM ET

Executives

Holger Bartel - Chairman and Global CEO

Glen Ceremony - CFO

Analysts

Tom White - Macquarie

Ed Woo - Ascendiant Capital

Operator

Good morning, everyone. And welcome to the Travelzoo First Quarter 2016 Financial Results Conference. 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 is call is being recorded.

Before introducing you to your host and beginning with the Company’s presentation, the Company would like to remind you that all statements made during this conference call and presented in the Company’s 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 the Company’s Forms 10-K and 10-Q and other periodic filings with the SEC. Unless required by law, the company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Please note that this call is being webcast from the Company’s Investor Relations website at www.travelzoo.com/earnings. Please refer to the Company’s website for important information including the company's earnings press 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.

Now it is my pleasure to turn the floor over to your host, Holger Bartel, Travelzoo's Chairman and Global CEO. Sir, you may begin.

Holger Bartel

Thank you, operator. Good morning and thank you all for joining us today for Travelzoo's first quarter 2016 financial results conference call. I am Holger Bartel, Chairman and Global CEO of Travelzoo, and joining me as usually is Glen Ceremony, our Company's Chief Financial Officer. Please Glen go ahead.

Glen Ceremony

Okay. Thank you, Holger and everyone for joining us today. For the format of today's call, I will review our first quarter financial results of 2016 and then Holger will provide an update on our strategy. Thereafter, we will open the call for question-and-answer session. Now, please open our management presentation which is available on our Investor Relations website at www.travelzoo.com/earnings, to follow along with our prepared remarks.

Slide 3 provides the key financial highlights for the quarter. These results include in the current and prior periods the financial results of the Asia Pacific business that we acquired in August of 2015.

Our revenue for the quarter was 34.8 million, down 11% year-over-year or down 9% in constant currencies. Our earnings per share this quarter was $0.14 which is $0.09 higher than the prior-year period. Our members grew to over 28.7 million and our social media followers and mobile app downloads continue to increase.

Slide 4 highlights the revenue by segment, revenue in North America was $21.7 million representing a year-over-year decrease of 13%. Revenue in Europe was $10.9 million representing a year-over-year constant currency decrease of 2% and Asia Pacific revenue was $2.3 million representing a year-over-year constant currency decrease of 10%.

The next few slides cover further detail on our revenue for each of our three segments. Slide 5, shows North America year-over-year revenue decreased by $3.2 million, 900,000 was due to lower voucher sales for local, as we have focused less on pushing these deals out and now have more of them available on a pull basis only. $1.1 million of the revenue decline was due to lower search spend and $1.2 million was from travel, primarily due to the transition from voucher sales for getaways to the hotel platform, where we recognize revenue later. We also discontinued some business activities in North America that were unprofitable which had the effect of decreasing revenues but increased profitability.

Turning to slide 6. There was an approximate 500,000 negative FX impact on Europe revenue. Europe year-over-year revenue on a constant currency basis shows that overall Europe revenues decreased by 2%. The constant currency decrease of approximately 200,000 was primarily due to lower search revenue from less search traffic acquisition spend. But our local business grew in constant currencies by 11% year-over-year.

On slide 7, Asia Pacific year-over-year revenue decreased by approximately 300,000 as we made changes to our sales force which affected us during the quarter.

Slide 8 provides a breakdown of our operating income. We had $3.1 million in overall operating income, each of North America and Europe generated $2.1 million of operating income and Asia Pacific recorded operating loss of $1.1 million which increased year-over-year due to the increased number of acquisitions. Despite lower revenue net income more than doubled year-over-year as we operated smarter and benefited from lower income taxes.

Slide 9 shows the cost of revenue and operating margin. The cost of revenue as a percent of revenue was stable year-over-year and down sequentially due to lower syndication revenue and voucher sales. Our operating margin percentage increased year-over-year as we gained more operating efficiencies.

Turning to slide 10. This demonstrates our progress on managing costs relative to revenue. Operating expenses as a percent of revenue in both North America and Europe declined and there was an increase in Asia Pacific’s cost as a percentage of revenue due to the increase in member acquisition.

Slide 11 shows that our productivity was up sequentially due to seasonality and was stable year-over-year.

Moving on to slide 12. DSO was up year-over-year as expected from our search partner and longer cycle for our Asia Pacific business.

During our first quarter we generated positive cash flow, we repurchased 1.9 million of our stock and we paid off our loan payable of $5.7 million. We exited the quarter with a solid cash position of $28.8 million of which $15.7 million was held outside the U.S.

Turning to slide 13. In summary for our revenue, the majority of the revenue declines were driven by plan reductions in search and local as well as negative FX. We saw improvements in profitability as our operating cost have come down driven by continued focus in operating smarter. And we have a solid cash position after paying off our loan payable and continuing to repurchase our stock.

Looking forward to our second quarter of 2016, we expect the following: we expect the recent year-over-year percentage rate declines in revenue that we have experienced over the last several quarters to persist and this is due to transition of our products that is still underway including declines and getaways local search as well as the elimination of certain unprofitable travel business activities.

We also expect the continued negative FX impact as well. We expect the second quarter to be seasonally lower then Q1 and we expect North America local to be flat slightly down sequentially. We expect to continue member acquisition at the increased levels of 2015 and we plan to increase investments in our new Asia Pacific segment and particularly China which will reduce the year-over-year EPS by approximately $0.06.

In addition we plan to continue product development compliance and efficiency initiative and expect to incur addition professional service cost to 600,000 sequentially. In summary, given these trend and investments we expect to generate lower operating income year-over-year and quarter-over-quarter. However, we are continuing to take steps to control our non-investment area cost and are focused on increasing the productivity of our resources.

So this concludes the financial summary of our first quarter of 2016. So now Holger will provide you an update on Travelzoo's strategy.

Holger Bartel

Please turn to slide 15. Our growth strategy continues to be built on two pillars. On one hand, we are looking to grow our audience, together now with our Asia Pacific business. We have over 28 million Travelzoo members worldwide and that base continues to grow.

We added over 1 million new members again this quarter. At the same time we are working to enhance our products to serve our users better. We not only want them to receive deals from us by e-mail and social media. But we also want to help them when they are actively searching for something specific, like a hotel room on a certain date. We believe that these product enhancements will result over time in higher revenues per member.

Slide 16 highlights how our investment priorities are aligned with these two pillars of our strategy, growth in our audience and improvements of our products. First, we continue to increase investment in acquisition of new members during the quarter. As I said, we added over 1 million new members and we explore ways to leverage strong social media presence and test some offline marketing channels. We have also begun to increase investments in Asia Pacific, the new members are expected to yield benefits to our business for years to come.

Second, we have been working to enhance our products to be more mobile-friendly and to enhance usability so that members can find more easily what they are looking for. A lot of work is underway in this area. We have improved our apps and we are actively testing our new simpler search and we have also made our emails easier to read on all devices and we've tested ways to deliver more relevant content to our members based on their likes and dislikes. All of these improvements are showing promising results.

Third, we continue to enhance our hotel platform for date-specific hotel searches. We have had this live in the U.S. for few quarters now and have begun to communicate to our members more actively that they can find hotel deals exactly when they need them. As searches and conversion rates are increasing, we are pleased that the number of hotel bookings continues to grow.

In fact, slide 17 gives more details on this. Bookings on our hotel platform have more than doubled in the past 12 months and have been strong so far this quarter. As you can see on the right, the number of people searching for hotels by date is increasing and rose particularly in the past quarter. Revenue growth however comes with a delay, as we only recognize commissions after hotel stay has been completed and not as we do in the case of a voucher sale at the time when members purchase a voucher.

On slide 18, I would like to highlight our progress in the area of social media and marketing. It is important for us to get the right deals to our members in whichever form is best for them, whether on their mobile phone or social network.

Social channels such as Facebook in North America and Europe or Weibo in China, enable us to deliver our content beyond our traditional email delivery and our members find if fun to share great deals they find from us with their friends.

Turning to slide 19. We are proud to continue to be the quality leader in this business. Day after day our staff-select researches, negotiates and validates the very best deals. Whether it's a vacation at the Four Seasons Hotel or dining at the Michelin-Starred restaurant, our focus is always on quality.

Our test booking centers ensure that the deals we publish are real and valid and not just bait-and-switch. We believe that our passionate focus on the very best deals and the very best places, drive loyalty in the long run and position us well for long-term success.

So let me summarize our management focus again on slide 20. Maintaining and even strengthening our quality content leadership is crucial. We intend to resume top-line growth in multiple ways, via products that make it equally simple for our members to search for offers, as to receive deals that inspire them to take a trip.

Revenues from our travel products are growing again and we expect this trend to improve further. We also continue to grow the number of people who use us. We see a particularly promising opportunity in the large and fast growing Chinese travel market. But as we invest on both fronts, we would like to remain profitable.

This concludes our prepared remarks. So now back to the operator.

Question-and-Answer Session

Operator

Thank you. The floor is now open for the questions. [Operator Instructions] Thank you our first question comes from the line of Tom White with Macquarie. Your line is open.

Tom White

Great. Thanks for taking my question. Two if I may, firstly maybe a sort of high-level one here. Over the past couple of months there has been kind of lot of talks from the hotel industry about ways that they're going to kind of try to drive more direct booking behavior on the part of consumers. So trying to in sense of consumers to come right to hotel use on websites, sort of bypassing online travel companies. Just curious if you have any sort of thoughts about kind of your positioning there would be if you’re seeing any impact either on sort of the kind of consumer side or sort of traffic side of your business or if this is kind of revealing itself at all and as you know kind of trying to build out and signup hotels for the kind of the platform part of your business? And then I have one quick follow up.

Glen Ceremony

Hi, Tom. Yes, you are absolutely right. I think the brands are looking more aggressively to try direct bookings, definitely something that we’re seeing. Two comments, one on the hand that would is because they see an increasing concentration of course on the side of Expedia and price line two partners that have become very, very strong and one become two dependent on them. So there we actually benefited with that the hotels come to us and see well it's great that I am not only dealing with Expedia and Priceline. So in that respect they are happy to participate with us.

On the other hand the second with a lot of the brands, we still have model where we also drive business to their websites. So people can book directly with them, it's probably going to heard as a little bit less than some of the larger OTAs because we don’t really see ourselves as an OTA, but rather the place who helps our members find deals and one of the major reasons why we enable the booking capabilities on our platform for hotels was in order to make it easier for our members to book on their mobile phones, that was really one of the major drivers. It was necessary that we wanted to say we are jumping into the OTA business.

So what’s the second question?

Tom White

Good. It was just... Thank you for that firstly. And just actually some kind of unprofitable business kind of segments reliance in North America. Just hoping to get a little bit more color on that.

Holger Bartel

Yeah, just to give you one example here. It is one of the things that Glen mentioned syndication we have partners with whom we work on having them display our offers to their audience. These are often newspaper sites, big publishers and so forth. And we had a couple of cases where we started getting the situation because of revenue guarantees we offered. We paid these partners more than the revenue we were generating and which has said well we should not really do this because it is something that really drives revenue. But it is not going to generate any profit for us.

So that was just an example of a couple of things we did in North America where we said we really want to operate more focused and smarter. And we just eliminated some activities that were in the short-term hurting revenues a bit. But on the other hand as you see it helped us drive profitability which in the end is probably more important for us.

Tom White

Got it. Thank you.

Holger Bartel

But just to be clear, we did not discontinue our syndication network, we just eliminated a couple of partners that were not effective any more.

Tom White

Got it.

Operator

Thank you. Our next question comes from the line of Ed Woo with Ascendiant Capital. Your line is now open. Please go ahead.

Edward M. Woo

Thanks for taking my question, I had a question about the overall health of the industry. It seems as if the industry is relatively strong, but obviously we had some specific events such as terrorist activity. What is your outlook for travel in the U.S. and international?

Holger Bartel

Hi, Ed, let me start off and then may be Glen can fill in a little bit as well. I think absolutely in Europe we saw that we were affected in Q1 particularly with I mean in Europe, Turkey's one of the most prominent place is where people want to travel. And with the political situation Turkey and particularly Bombings and so forth and North America which is a big destination for people in the South of Europe, that definitely affected travel behavior in two ways.

On the one hand our advertisers didn’t want to promote as much pick it just Turkey anymore which affected us. And second, the places like Spain and Portugal where we use to find more deals. We were seeing fewer deals this quarter. But I think Richard, our head in Europe he definitely feels that there was in general just a slightly bigger reluctance for people in Q1 to book travel.

Normally the Europeans love to book travel well ahead. They book in Q1 already for summer and this year maybe because of all the things that were happening in Europe, people were a bit more hesitant. But we hope that that will pick up again in Q2 because in the end I don’t think people want to miss their vacation.

Edward M. Woo

Great. And in terms of FX, how long do you think it is going to be a drag on your results, it seem to be kind of bouncing out right now, you think that will be less for drag in back half?

Holger Bartel

Glen?

Glen Ceremony

Yes, it should be less than the drag in the back half. But we will see what FX rates do, but from the historical patterns that is what we expect.

Edward M. Woo

Great. And then last question I had as you said that you going to be spending $0.06 EPS impact for stop acquisition in the second quarter, is that correct?

Holger Bartel

Regarding on APAC.

Edward M. Woo

Yeah.

Holger Bartel

We are just trying to frame the increased member acquisition spends that we are going to focus on Asia going forward.

Edward M. Woo


Is that incremental to what you spend this quarter, so we can expect an additional $0.06 or how much do you guys spent?

Holger Bartel

That was a year-over-year $0.06.

Edward M. Woo

Year-over-year.

Holger Bartel

Yeah.

Edward M. Woo

Okay. Well, thanks for taking my questions, wish you guys a good luck.

Holger Bartel

Thanks, Ed.

Glen Ceremony

Thanks, Ed.

Operator

Thank you. [Operator Instructions]. Okay, I am showing no further questions. I’d like to turn the call back over to Holger Bartel.

Holger Bartel

Thank you, everyone and we look forward to speaking with you again next quarter. Thanks and have a great day. Bye.

Operator

Ladies and gentlemen, thank you for participating in today's teleconference. You may now disconnect your lines at this time. Everyone have a pleasant day.

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