Travelzoo's (TZOO) CEO Holger Bartel on Q2 2016 Results - Earnings Call Transcript

| About: Travelzoo Inc (TZOO)

Travelzoo, Inc. (NASDAQ:TZOO)

Q2 2016 Earnings Conference Call

July 28, 11:00 AM ET

Executives

Holger Bartel – Chairman and Global Chief Executive Officer

Glen Ceremony – Chief Financial Officer

Analysts

Tom White – Macquarie

Ed Woo – Ascendiant Capital

Operator

Good morning, everyone. And welcome to the Travelzoo’s Second 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’s 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 90 minutes after the conclusion of this call.

Now it is my pleasure to turn the call over to 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 second quarter 2016 financial results conference call. I am Holger Bartel, Chairman and Global CEO of Travelzoo, and joining me today is Glen Ceremony, the Company's Chief Financial Officer. Glen will start off and walk you through the days format.

Glen Ceremony

Thank you, Holger and everyone for joining us today. For the format of today's call, I will review our second quarter financial results and then Holger will provide an update on our strategy. Thereafter, we will open the call for our 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 last year.

Our revenue for the quarter was $34 million, down 7% year-over-year, which is down 6% in constant currencies. Our earnings per share this quarter was $0.14 which is $0.08 higher than the prior-year period. Our members grew to over 28.9 million and our social media followers and mobile app downloads continue to increase.

Slide 4 highlights our revenue by segment, revenue in North America was $21.9 million representing a year-over-year decrease of 8%. Revenue in Europe was $9.7 million representing a year-over-year constant currency decrease of 2% and Asia Pacific revenue was $2.4 million representing a year-over-year constant currency decrease of 10%.

The next few slides cover further detail of our revenue for each of our three segments. Slide 5, shows North America year-over-year revenue decreased by $1.9 million, $1.5 million 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. And $500,000 was from travel, primarily due to elimination of unprofitable business activities.

Turning to slide 6. There was an approximate $340,000 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. This is offset by our travel business growth in constant currencies by 2% year over year.

On slide 7, Asia Pacific year-over-year revenue decreased by approximately 300,000 as we made changes to our sales team in various contries.

Slide 8 provides a breakdown of our operating income. We had $3.8 million in overall operating income, North America generated $3.2 million and Europe generated $1.8 million which were both increases year-over-year. Asia-Pacific recorded an operating loss of $1.2 million which increased year-over-year due to our planned increase in member acquisition spend. Despite lower revenue net income increased year-over-year as we operated smarter.

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

Slide 10, demonstrates our progress on managing costs. Operating expenses in both North America and Europe declined year-over-year. There was an increase in Asia-Pacific’s cost due to the planned increase in member acquisition spend. Our product development costs were down this quarter driven by capitalization of selective project costs as well as a shift to some projects in future quarters.

Slide 11 shows that our productivity was up slightly year-over-year and sequentially. Moving on to Slide 12 DSO was up year-over-year as expected from our search partner and a longer cycle for our Asia-Pacific business. We generated positive cash flow during the quarter and repurchased 3 million of our stock, exiting the quarter with a solid cash position of $27.6 million of which $16.2 million was held outside the U.S.

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

Looking forward to our third 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. This is due to the transition of our products that is still underway including declines and getaways local and search as well as the elimination of certain unprofitable travel business activities.

We also expect the continued negative FX impact. And in Europe, we expect trends to worsen given the travelers security concerns. We expect the third quarter to be seasonally lower than Q2. And we expect to continue member acquisition at the increased levels of 2015. We plan to increase investments in our new Asia-Pacific segment and particularly in China which will reduce year-over-year EPS by approximately $0.06.

In addition, we plan to continue product development compliance and efficiency initiatives and expect to incur additional professional service cost of $800,000 sequentially. In summary, given these trends 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 non-investment area costs and are focused on increasing the productivity of our resources.

This concludes the financial summary of our second quarter of 2016. 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 with our Asia-Pacific business. We now have over 28 million Travelzoo members worldwide and that base continues to grow. 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 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 audience and improvements of our products. First, we continued our increased investment acquisition of new members during the quarter. We added 900,000 new members and we are increasing – we increasingly leveraged our strong social media presence. We also have increased our 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 more easily find what they are looking for. We have made our e-mails easier to read on all devices and we've began testing our new responsive site with select members. As to redesign, site makes it much easier for anyone to find deals where and when they need them, early feedback is promising.

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 year-over-year.

Slide 17 provides more detail on this. The number of hotel searches has almost doubled in the past 12 months and has been strong so far this quarter. Revenues from our hotel platform are also increasing but they are affected by seasonality, as we recognized commissions only after the hotel stay has been completed and not as we do in the case of voucher sales at the time when the members purchase a voucher.

On Slide 18, I would like to highlight our progress in the area of social media and marketing. We want 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 e-mail delivery and our members find it fun to share great deals they find from us with their friends.

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

Our test booking centers ensure that the deals that 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 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. 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, Michelle.

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 of Macquarie. Your line is open.

Tom White

Great, thank you for taking my question. I guess just first on your comments about the European travel, I was hoping to may be get a bit more color there. I think a few weeks ago you guys published, put out a press release talking about kind of no elevated cancellation rates as maybe the result of Brexit or terrorism. I guess trying to just kind of reconcile that with your comments about 3Q. Are you guys starting now to see maybe a ramp in cancellations or any kind of other just changes in booking behaviors from European travelers that you could call out? And then I’ve just got one follow-up on guidance.

Holger Bartel

Hi, Tom, yes it’s not so much cancellations, but yes these very horrific and very saddening terror attacks in Europe certainly affect our business, we’ve seen that in Q2. And we expect to see probably even more of an impact in Q3 and Q4. It depends on what happens and how this trend continues. The way it affects us is in two ways. On the one hand places where terrorist attacks occur, in particularly places like Turkey, or France, or now also in Germany, travel advertisers don’t want to advertise these destinations.

So yes we are losing on the one hand advertising revenue from advertisers who previously promoted destinations like Turkey. I would say a year or two years ago Turkey was probably one of the most popular destinations promoted in our UK top 20, now it happens very rarely. Also of course at this time we don’t want to go out and all of a sudden recommend with dozens of deals to our UK members to go to Egypt, if this is a dangerous place to travel to at this time.

On the other hand travelers and probably that trend also affects most of the travel companies we heard this morning from Thomas Cook seeing quite a decrease in bookings in places like Turkey and some of the popular UK travel destinations. So what’s happening is that people now, they still want to travel and we haven’t seen an overall decline in traveling. But people travel to places that they consider safe. So places like Spain and Portugal are more popular to some and that means it’s a bit more difficult for us to find deals there. So advertise obviously we want to promote them, but the deals are not as strong.

Good news is that more people from Europe want to travel to the U.S. So U.S. we have a very strong business and so there’s a good opportunity now to promote more U.S. travel deals to our audience in Europe. But net-net I would say yes we are certainly impacted, but also in the spirit of everyone we just hope that this series of terrorist attacks is coming down and not continues at the level we have seen in the last week.

Tom White

Great. And then I know I said my follow-up again guidance but I changed my mind. The stats around date-based search that you gave on Slide 17, can you give us any sense about sort of what percentage of say you’re North American travel revenue today comes from kind of commissions, from bookings like this? And I understand kind of the different revenue recognition. But just kind of curious about so what it is today, maybe how you think that will look maybe exiting the year? And then maybe a couple years out kind of is this going to sort of drastically kind of change the kind of composition of your North American travel revenues over the next few years, or is it going to kind of just be sort of a complement to kind of the core business? Thanks.

Holger Bartel

Yes I’ll let Glen answer that. But just a quick note before Glen jumps in. I mean hotels is obviously only a part of our business, we have a big business in vacations, tourism boards and so forth. So hotel is only a part of our revenues and then again commissions on hotels are again just a part of hotel. So just let’s keep that in mind. But Glen do you want to take this?

Glen Ceremony

Yes, so hi Tom. Not a not a significant portion right now and I wouldn’t expect it to be dramatically larger by the end of the year as you remember. There are few reasons why we got into this business; one was just with those trends on mobile, we wanted a solution that we could give our members a good experience on the hotel deals that we represent. And one thing, nothing's changed, we're still presenting really amazing hotel deals. It's just the way we're presenting that is different and the way we’re monetizing that is changing. And there is – I would say a gradual shift from our advertising and the voucher-based hotel products to this hotel platform.

Holger Bartel

The reason why we see it as an opportunity is not so much only on the revenue front Tom, but also on the bottom line because people are booking deals that we already have. We have a relatively fixed cost infrastructure in place for the platform. So as this business scales – and also these are members who are booking hotel deals, so we don't have any additional incremental marketing cost associated with it. Given all of these things, this is a business as it continues – as it grows, as it continues to grow, as it scales, has a very high incremental margin for us, which makes it attractive for us.

Tom White

Understood. Thank you.

Operator

Our next question comes from Ed Woo of Ascendiant Capital. Your line is open.

Ed Woo

Yes, thanks for taking my question. Going to the guidance, you did mention that you guys are going to continue to get somewhat profitable products and whatnot. What does the comp get easier? I know you guys been kind of trimming down some of your searches, area – some of your local areas over the past year or so. So just curious in terms of when the comps will get easier.

Holger Bartel

Glen, do you want to respond to that? And Ed, certainly we want to have this business be in a position where it grows year-over-year. So, yes, we know we had – we have gone through some efforts to eliminate activities that just really didn't make any sense. And as you see, in spite of the revenue decrease we’ve had year-over-year, our operating margins have improved quite significantly.

If I look at just the operating margin for Europe and North America, we’re now well above 10%. So that's great, but of course we want to bring back growth as well. It's a little difficult to say when that will occur. It's clearly our intention. We clearly have a plan for that. How long it takes is difficult to answer. And so far it's been taking a little bit longer than we’re hoping for. But also keep in mind I just took over as global CEO at the beginning of this year. Glen, do you have anything to add?

Glen Ceremony

Yes, I think you've covered most of it. I would say, Ed, we're probably not in the ninth-inning, right. And so we still have some work to do, but I think the progress that we're making and making the right tradeoff choices and kind of getting us in a position to where we can get in that mode are pleased with, right, but it would be hard to predict at this point.

Ed Woo

All right. And then second of all, you mentioned that you're going to continue your investments spending on customer acquisitions. You guys added big most of customers this quarter. Was your focus be on increasing growth, specifically in China, Asia markets? And also in terms what you think that while this quarter to get 900,000 new customers.

Holger Bartel

Yes, China will be an area where we’ll probably increase investments over time. You have to keep in mind that the marketing team in China, Asia-Pacific – travel to Asia-Pacific was a completely independent separate business, so it didn't really benefit much from all the learnings that we had made the travels in Europe and North America apart what's the best way to acquire members. And then also, China, it's obviously a very different market than the North America and Europe.

One thing that's clearly very different is that the amount that people – the amount of people who – U.S., I mean, North America, and yes, it's still very normal to use an e-mail address to signup for something, in China you really signup with your mobile number. So there's a few differences and it's probably going to take us a couple of more quarters to learn exactly how to run it most effectively member acquisition in China, but as we learn that we will likely increase our investment deal.

Such a market that has responded very well to our offering. So we are very happy about it and that's why we're – why we’re really optimistic about China. And last but not least, the travelers who team in China has really built quite a good reputation for the brands, so we have a very good brand name in China. It's still small, we're not that well known yet, but those people who know us and also the travel industry we have a lot of respect for us, bit quite well positioned deal.

Ed Woo

Great. Thanks for answering my question. Best of luck.

Holger Bartel

Thanks, Ed. Bye.

Operator

There are no further questions. I’ll now turn the call back over to Mr. Holger Bartel.

Holger Bartel

Great, thank you everyone. So ladies and gentlemen, we look forward to speaking with you again next quarter. Thanks and have a great day, bye.

Operator

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time and have a pleasant day.

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