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Travelzoo Inc. (NASDAQ:TZOO)

Q1 2012 Earnings Call

April 19, 2012 11:00 am ET

Executives

Chris Loughlin - CEO

Glen Ceremony - CFO

Analysts

Dan Kurnos - Benchmark Company

Naved Khan - Jefferies

Ed Woo - Ascendiant Capital

Ryan Bergan - Craig-Hallum

Operator

Good morning everyone and welcome to the Travelzoo first quarter 2012 financial results conference call. At this time, all participants have been placed in a listen-only mode and the floor will be open for questions following the presentation. Today’s call is being recorded.

I know have the pleasure to turn the floor over to your host, Mr. Chris Loughlin, Travelzoo’s Chief [Executive] Officer. Sir, you may begin.

Chris Loughlin

Thank you, operator. I am glad I am not the Chief Financial Officer. I am in fact the Chief Executive Officer. Good morning everybody and thank you for joining us today for Travelzoo’s first quarter 2012 financial results conference call. I am Chris Loughlin, the Chief Executive Officer. Today with me is our Chief Financial Officer Glen Ceremony. 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 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 Form 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 archived recording of this conference call will be available on the Travelzoo Investor Relations website at www.travelzoo.com/ir, beginning approximately 90 minutes after the conclusion of this call.

For today’s format of the call I will review our first 2012 financial results, and then Chris will provide an update on our strategy. Thereafter we will conclude with the question-and-answer session.

Now, please open our management presentation, which is available at www.travelzoo.com/earnings.

Turning to slide four, this provides you the key financial highlights for the quarter. We achieved record revenues of $39.3 million this quarter which is up 12% over prior quarter and up 6% year over year. We also achieved record non-GAAP earnings per share of $0.42 which is up 14% from the $0.37 non-GAAP earnings per share for the same period last year. And we maintained steady growth in new subscribers helping the Travelzoo brand eclipse the 25 million subscriber milestone worldwide. We continued our profitable growth and made further progress with subscriber growth despite a competitive environment exhibiting unsustainable loss-making business practices.

On slide five, we look at revenue by segments. Revenue in North America was $28.6 million representing a year-over-year growth rate of 4%. In Europe; revenue growth rate was 14% year-over-year which is lapping explosive growth from last year.

In local currency Europe revenue growth was 60% year over year. We will provide some more insights on revenue in the next few slides.

Turning to slide six, we breakout our revenue by type. The first category of revenue is Travel. This includes the products our subscribers and advertisers have enjoyed for over the years that present tested high quality deals coming primarily from our flagship products such as Top 20, Newsflash, website and network.

In addition our Travel revenue includes our Getaway voucher-based format. This aligns with the way we manage Getaways and make sense of Getaways includes hotel stays which our existing advertising products cover as well. The second category of revenue is Search. This includes both our search products Fly.com and SuperSearch. We continue to believe these two are great compliments to our business as both provide an easy way for our subscribers to compare and shop for airlines, hotels and car rentals.

The third category of revenue is Local. This includes both Local Deals, voucher-based formats as well as our entertainment business which contains a mix of voucher-based and non voucher-based deals. We view these revenues as one category as they represent our efforts to provide subscribers with high quality local deals whether it is a restaurant, spa, activity, show or concert events

Now let's take a look at the revenue by type for each segment for this quarter. Starting on slide seven, the North America first-quarter revenue broken down by type, it shows Travel increasing sequentially by 8% and declining by 4% year over year. The sequential increase is due to seasonality. The year-over-year decline was due to a reduced spending by certain online travel agency customers, airline consolidation and competition.

This was offset by our continued strong growth in our hotels business which includes Getaways. We are very pleased with the continued rollout of Getaways as it provides us with the opportunity to participate in more of the potential upsides compared to our flat-rate advertising products. North America Search first quarter grew 29% sequentially due to seasonality and grew 1% year-over-year which was impacted by challenging market pricing for traffic acquisition.

North America Local revenue increased sequentially and continued to show growth year over year at 30%. We continue to focus on building out our management of this business. We are seeing positive signs such as increasing sales force productivity in each region of the US, stable take rates and consistent average numbers of deals. We continue to focus on growing profitably and our confidence that this format is an attractive long-term growth opportunity.

Turning to slide eight. You see the breakdown of revenue for our Europe segment. Europe Travel is showing a 20% sequential growth and a 1% year-over-year growth. Europe revenues grew year-over-year for revenue type, for each of the revenue type despite the challenging economy. Although we expect to seasonally up first quarter we were impacted by certain advertisers going out of business and competition.

Europe Search grew 13% sequentially due to seasonality and grew 35% year over year with continued growth of Fly.com. Europe Local declined by 11% sequentially, yet grew at 82% year over year. The sequential decline was driven by seasonality including an early Easter which affected the last week's trading amidst Europe's uncertain economy.

We believe there are still many untapped opportunities, yet we are still focused on seizing these opportunities with profit in mind. You can see further history of our quarterly revenue by type in the appendix to this presentation.

Slide nine provides more detail on our operating income. I would like to point out that this excludes the impact of $3 million charge this quarter related to our unexchanged, merger share contingency. This contingency was previously disclosed in our Form 10-K filings.

We settled a portion of this similar contingency with the State of Delaware during last year's first quarter. However, we still have some potential exposure to resolve with claimants that never exchanged their shares during our 2002 merger or to settle with various states that may seek for us to pay them for this matter as unclaimed property.

We excluded this quarter’s $3 million charge and last year's $20 million settlement with Delaware in our non GAAP result due to the unique nature of this matter and to allow for a better comparison to our actual results. The appendix for this presentation includes the reconciliation of our GAAP and non-GAAP measures.

Non-GAAP operating income for the quarter was $9.5 million. Of this total, North America contributed $7.1 million, while Europe contributed record profit of $2.4 million. This was our fourth consecutive quarter of profitability in Europe.

Our income tax expense was $2.9 million. And all these components led to record quarter, non-GAAP net income of $6.7 million and record quarter, non-GAAP EPS of $0.42.

Turning to slide 10, you can see our cost of revenue on the left hand side. Since last year, our cost structure has changed due to the build out of Local Deals and Getaways. Quarter-over-quarter cost of revenue remains stable as we've established the key components needed to operate voucher-based format.

On the right, you can our non-GAAP operating margin sequentially increase, driven by increased revenues and our continued focus on profitability. Slide 11 captures our operating expenses. As the percent of revenue, North America decreased due to the build out of Local Deals and legal defense costs. Europe operating expenses, as a percent of revenue, decreased as Europe has continued to scale.

Moving to slide 12, this shows that our headcount increased from 350 last quarter to 360 this quarter. Our hiring was net of attrition and weighted towards the end of the quarter. We did resume hiring this quarter and began to see productivity improvement. We intend to continue to hire while focusing on productivity in order to invest in opportunities for future growth.

Turning to slide 13, you can see there, we’re maintaining our strong collections and growing cash balance. We ended the quarter with $48.6 million in cash and cash equivalents. This was up from prior quarter as a result of our operating cash flow of $9.8 million.

On slide 14, we summarize the financial results for the quarter. We achieved record revenue and record non-GAAP EPS as well as the fourth consecutive quarter profitability for our Europe business segment. Our focus continues to be on profitable growth and improved productivity. And we have a strong positive cash flow and cash position.

Well, that wraps up the financial summary for our first quarter. Now, Chris will cover some highlights regarding Travelzoo’s growth strategy.

Chris Loughlin

Thank you, Glen. I would like to start by highlighting our competitive environment. We believe our short term growth opportunity may be hindered by competitors who continue to operate below cost and sustain huge losses. The daily deals industry ramped up quickly, the venture capitalists and corporations piling in huge amounts of investments and adopting a grow-at-any-cost mentality.

Last year alone, the two leading market participants lost close to billion dollars to drive on profitable revenues. This approach is clearly not sustainable in the long run, but it presents challenges in the competitive environment and puts pressure on us in the short term, where we see competitors operating at significant negative margins, adding subscribers at almost any cost, signing up merchants on unprofitable terms and managing the business with little regards for risk.

Despite the fact that we are hindered in the short term by these industry dynamics, we believe our profitable, quality leadership strategy puts us in an excellent position for future growth and to take advantage of the impending shake out.

Moving to slide 17, I want to highlight our growth strategy, which consists -- which we also highlighted in prior quarters. Over the past two years, we’ve focused on driving revenue per subscriber growth along the Y-axis, largely driven by the introduction of Local Deals, starting in 2010 and Getaways starting in 2011.

With Local Deals, we offer our existing subscriber base of now 25 million deals for high quality restaurants, spas and activities, and shows and concerts in the local cities and destinations they travel to.

We are now in a 111 markets across six nations. We’re publishing 0.79 deals per week and we intend to increase the frequency to two deals overtime while also continuing to add more markets.

At the end of February, we appointed Mark Webb, a seasoned executive from American Express and British Airways to lead this business as the President, Travelzoo Local. Such is our confidence in the future growth potential of this format.

With Getaways, we negotiate deals on behalf of our subscribers, which typically includes dining or spas opportunities as well as an overnight stay. Getaways has proved very positive to our overall business.

In many cases, we are driving significantly more room nights to our hotel partners, who would appreciate the commission model. And as such, we were able to achieve significantly greater revenue per hotel campaign than our fixed advertising model.

In Q1, for example, we generated over 5,000 room nights for hotel and Travelzoo benefited with $200,000 net revenue from that campaign. Previously, we would have achieved an advertising fee of approximately $7,500. We feel good about the future potential of our Getaways opportunity.

With these new formats now part of our DNA and plenty of room for growth, we are turning our attention to our four strategic elements, and these are sales force ramp, reacceleration of subscriber growth, subscriber engagement and mobile with syndication.

Turning to slide 18, you can see that after an increase in Q1, our sales force remained relatively flat over the next year. While we already led the industry and sales force productivity, we wanted to make sure that our sales organization and processes were honed before we commence for the next ramp.

We also wanted to ensure that we had adequate management talent in place, the new sales managers who are all taken care off and could become productive quickly. And in addition to Mark, this quarter we added Richard Singer from the Telegraph Group as our number two in Europe.

With our productivity turning the corner -- this quarter, as Glen showed you on slide 12, and with a clear structure, process and experienced management now in place, we intend to immediately ramp our sales force adding 50 sales staff to the business. You can see we've already made some progress in Q1 adding 19 new sales managers, but we also released some less productive people.

Turning to slide 19, I would like to talk about our next strategic element to reaccelerate subscriber growth. You can see that over the past 12 months we made huge efficiency gains in subscriber acquisition and this was driven by a stronger focus on conversion and a positive lift from our new Local Deals format where 34% of purchases were not subscribers before they purchased.

We are thrilled that the Travelzoo brand now has 25 million subscribers, but we still see plenty of room for growth. Now the competition to me it is cooling off and we have significantly enhanced our product offering. We feel that we can resume a more aggressive growth trajectory.

Turning to slide 20, I want to touch on our third strategic element, subscriber engagement. As we publish outstanding deals like this offer in Westlake Village at the Four Seasons, we attract a very high quality audience. In this case, if you look at the pie chart, you can see that 58% of subscribers are what Experian core of the Power Elite. These are the wealthiest people in America.

When these high quality people turn up to these high quality establishments and have a great experience, not only do the subscribers tell their friends which attracts more subscribers, but the businesses also tell other businesses and word spreads. Great brands rise not because of their name or logo, but because the experience people have through them. And we are finding that through our quality leadership we are having a very positive lasting impact on the brand.

One measure of brand equity is subscriber engagement through repeat purchase. In Q1, over 30% of subscribers who purchased a Local Deal will already repeat by us. We did not employ discount tactics to provoke this repeat purchase behavior. We simply provided outstanding deals of high quality establishments and people were obviously happy first time around.

With Local Deals and Getaways, we are now getting to know our subscribers a bit better too and you can see that on the chart, this is demographics summary of that particular deal. Once a subscriber purchases from us, we can start to build a better picture of, who that person is and then build products and provide content that’s more tailored to their lifestyle. We see subscriber engagement and not only take as a key strategic element for future growth.

Turning to slide 21, I want to share with you our fourth strategic element, which is the expansion of deal delivery beyond our core email format to improved mobile, social media and syndication.

We are very excited about the early progress we are seeing in mobile. In the past 12 months mobile access to our deals increased from 10% to 20% in the US and from 7.5% to 20% in the UK; our two largest markets. In the US alone our subscribers purchased approximately $700,000 worth of Local Deals and Getaways vouchers through the mobile devices in March.

We now have 0.5 million downloads to iPhone App getting good attraction with Android. Relative to our competitors, we have quite some way behind in terms of mobile penetration, but we believe this is a tremendous growth opportunity for the future. Especially, given that we have travel, local and entertainment content which is perfect for this medium. We see a future not just of apps under the Travelzoo brand, but other single formats that leverage our outstanding content.

Social media and syndication of Local Deals and Getaways to the Travelzoo network which boasts 55 million unique users each month, presents a further opportunity for dealer distribution. As yet we have not yet been distributing this content aggressively through the Travelzoo network.

You can see on the right attached we recently round with New York Magazine, where they sent our Local Deal, a dinner at the famous Aquavit Restaurant in New York City to their subscribers. This is not only revenue accretive it’s also a powerful brand extension and allows us to acquire new subscribers, essentially free. We are now putting significantly more focus on the strategic element and are genuinely excited about the growth opportunity ahead.

To wrap up, we believe that our profitable approach and strong focus on quality leadership combined with our four strategic elements that I just highlighted positions us very well for future growth. Across our three content types and in the way in which we approach business, we are setting the highest standards of excellence. As the competitive environment now starts to shake out, we intend to fully capitalize on our position of strength.

Moving onto the last slide 23, I want to include by summarizing on our continued focus for 2012. And these are, maintain our quality leadership position by publishing outstanding high quality deals and tightening brand control. Reignite growth in our core travel business with a larger more effective sales force. Continue to ramp our Local Deals offering, expand into additional US, Canadian and European cities while increasing deals frequency and revenue per market, maintaining rapid subscriber growth especially in Europe while extending profitability, significantly ramp up mobile product presence in audience, improve efficiency as previously stated to further grow earnings per share.

As a reminder, Travelzoo’s consistent practice is not to provide guidance for future periods, because of the dynamics of our industry.

This concludes our prepared presentation. So now I would turn it back to the operator for the question and answer session.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question is from Dan Kurnos of the Benchmark Company. Your question please?

Dan Kurnos - Benchmark Company

Chris, let me just start-off by asking, is there any truth to that you are seeking advisor to explore strategic alternatives?

Chris Loughlin

Hi there, no, we provide no comment on this topic and today we would like to talk about our Q1 earnings and the future growth strategy.

Dan Kurnos - Benchmark Company

Alright, so then in terms of the Local Deals business you know I understand how you feel about the competitive nature and what your competitors are doing in the industry. I am just curious how you feel overall about the strength of the industry and how Travelzoo is performing within the industry? And then in terms of competition, are you seeing any increased competition from Groupon on the high-end space?

Chris Loughlin

Well, I am trying to frame your question, because there were two questions there. How do we perceive the industry? We perceive the industry that we are the only company that’s serious about making profits. We demonstrated this. And we are also very serious about being focused on quality with regard to the industry; participants are not the two largest participants lost $1 billion last year. One participant’s loss was $2 for every dollar of revenue and that’s not sustainable.

So we like to approach the business profitably. We are the industry leader in terms of average revenue per local deal published, I believe we are $29,000 in gross revenue this last quarter which was up from Q4, so we feel very positive about our position in the industry, but we are different, we are not a daily deal site, we don't publish deals everyday and I think that, that's an important thing for everyone to start to understand.

Dan Kurnos - Benchmark Company

Okay, let me just turn then, your North America operating margins were down pretty significantly year-over-year, could you give us a little bit of color on what drove that?

Glen Ceremony

I think the primary driver of that, is that sequential down with the revenue side from some of the online travel agencies not paying as much.

Dan Kurnos - Benchmark Company

So then just a follow-up on that. I mean we saw that you had some pretty strong getaways in the quarter but you obviously had the Travel weakness, I mean excluding Getaway, do you expect that weakness to persist in the near term until you can re-ramp the subscriber growth as you were talking about in your presentation?

Chris Loughlin

May I just comment on that. I mean I am not sure it’s a function of the subscriber growth, for example in the UK, of the top 44 advertisers from Q1 last year, 10 of them no longer exist. So what our sales force is doing is replacing business in the core. And in North America we are seeing the same, it's not so dramatic that there are so many businesses folding, but businesses they cut back and they prefer to find a safe harbor and go for profitability rather than growth which ultimately, they didn't spend as much for this year versus last year and that's what's happening. We are ramping our sales force. I just said that we would be adding now 50 people, we added 19 people in sales and we aim to replace that business, but also grow the getaways in overall hotel business.

Dan Kurnos - Benchmark Company

And just finally, I mean, as you said you've got a lot of initiatives now and then intend to sort of reaccelerate the business here. It's seem like you could spend a lot obviously you want to run the business for profitability, I mean you know what sort of a balance that you want to strike between the two, I mean how much profitability you are going to sacrifice to ramp this and how, is the builds more of a steady build or is it something that you’re going to do you know relatively quickly and then you know and then increase the sale force effectiveness from there?

Chris Loughlin

I think, you come to know as now we’re rational, reasonable people, we will invest at the right speed, if we see that productivity for employees start to dip, we pull back. If we see that revenue per subscriber starts to dip sufficiently we would pull back in that investment. And we’ll keep growing this business steadily for the long run and I think we’re very, very excited about our future opportunities. I think the mobile opportunity is one not to be lost, the conversion rates, the uptick that we are seeing in mobile is just such an untapped opportunity for this brand. And given that content and format we have, it's just perfect.

Operator

Our next question is from Naved Khan of Jefferies.

Naved Khan - Jefferies

Just on the Travel side, you guys spoke about the weakness in the advertising the market and typically Q1 tends to be sort of peak season for that and a kind of depth from there so how should we be thinking about this business for the rest of the year? Do you think the trends will persist or some of the efforts you are making here, you think that might pay off two or three quarters down the line?

Glen Ceremony

Sure. Yeah on the current quarter results, like I said some of the spends we have pulled back on the online travel agencies, we are working hard to see, how we double back and make sure they are seeing the value and part of that we control. The other part is their decision on that. So kind of to be determined on that and what we are really pleased to see was just the strong activity in Hotels. When you look at that category, definitely growth in that category. So that includes the gateways and it seems to be going as planned or better than planned.

Chris Loughlin

I mean Naved, it's just sort of a story of two haves, the asset holders, the hotels, the cruise lines, to some extent the TransAtlantic Airlines. We either are still positive or no change and then the intermediaries, we did see a pull back because these are people who are more focused on demand aggregation and I know it’s not so important to them, if they drive up revenues or they have an empty room because they don’t own the rooms. So that's something we are working on and in that group of hiring, we will be hiring people to continue to develop new business to replace the businesses that have failed, but ultimately that's the focus.

Naved Khan - Jefferies

Okay, that's a different color. And to talk about increasing the sales force productivity and hiring more sales force people, what are the similar things you can do to increase productivity and basically also increasing the deal frequency?

Chris Loughlin

We have conducted over the last three months, a strategic review of sales process, both well in all three divisions in Europe, in Local and in North America and the process is much more clear now and it's very defined. So as new people come in, they understand the process much faster and that allows us to get people to ramp. We also built some new systems that give us a greater visibility. You know for example if you take over a book of accounts, a new sales manager, you have much better visibility now than your predecessor on who advertised this time last year. So simple wins like that and also just a recognition within the management team, that that's a key priority and that means we need to bring in top quality managers. We demonstrated that with Mark and Richard, but we intend to bring in more top quality managers at the mid level and continue to grow.

Naved Khan - Jefferies

So this sort of target of 50, do you plan on sort of ramping up, sort of on the early side on this or is it going to at an even pace throughout the year or how do you sort of vision this?

Chris Loughlin

What they say is you know it's really a great opportunity for us right now, we are seeing a shakeout in the industry. We just hired two people in Germany who we think are top-quality candidates that came from one of the two larger participants. These people are leaving these companies now. So as soon as we can find the candidates, we will bring them on and that’s our intention, we would like to go as fast as we can.

Naved Khan - Jefferies

So you mentioned about the sort of redistribution by the New York Times for your daily deal, is there a bigger opportunity there that you are exploring or should we think about this?

Chris Loughlin

We are exploring many opportunities with syndication and distribution. I think the biggest opportunity for us is mobile, but our content is very, very attractive, I mean its unique content. If you go to our website today and look at this deal to the Omni Hotel in Dallas, it’s a brand new hotel, it’s a beautiful spot that you would get on a plane from New York City to go to Dallas to go and enjoy that spa, its that beautiful.

And when you've got content like that and if you look at this New York Magazine deal that's Aquavit. Aquavit is one of the best restaurants in New York. We also had Gilt. Gilt is a Two Michelin Star restaurant in New York City. When you've got that kind of content people want to write about it and include in their publications.

So we see a tremendous opportunity for distribution and we have now focused on that yet. We are very focused on getting the deals, but we are excited that we can now start to look at that.

Naved Khan - Jefferies

And final question for me, I think some of the numbers you mentioned, I hope I have them right but you said that around 34% of the purchases from subscribers who are new to Travelzoo? And you also said that in Q1 around 30% were from basically repeat buyers? So it seems to me that the repeat buyers may be buying or spending more on Travelzoo or almost double in terms of spend; is that the right way to look at it or I have my numbers wrong?

Chris Loughlin

Glen, I don't understand the question really, maybe Glen you could answer that. Do you understand the question?

Glen Ceremony

Yeah, I didn’t really get the question, but you repeat it as far as the stats or what we are seeing?

Naved Khan - Jefferies

Yeah, so if 34% of the purchases are being done by people who are new to the company or new to Travelzoo and then at the same time you said that 30% of the buyers were repeated; so it seems like those 30% account for roughly 70% of the money spend and therefore repeat buyers are spending almost double of the new buyers; is that the right….?

Glen Ceremony

I am not sure that these two numbers are -- I am not sure that they are mutually exclusive right. So it could be just on the repeat purchase, it could be that you bought a deal in Q1 in January and then you bought a deal in March in which case you are repeat buyer, but you could have also be new to us in January, you see. So I don’t think that you connect those two numbers like that.

Naved Khan - Jefferies

Got it.

Chris Loughlin

But the exciting thing is that we’re getting subscribers from operating this high quality deals, new subscribers and then the people who are buying the deals are having a good experience obviously these are coming back. So that’s really encouraging.

Glen Ceremony

It’s actually, you see, I mentioned in the US, $700,000 of the voucher value of gross revenues as you would call it that’s coming from through mobile devices and so I think our mobile platform alone would mean that we are somewhere in the region of the sixth or seventh largest publisher in this space in the entire United States; just through mobile if you were to look at the report in terms of how much companies sell these vouchers and we really just got started there.

Operator

Thank you. Our next question is from Ed Woo of Ascendiant Capital. Your question please.

Ed Woo - Ascendiant Capital

Yeah, it’s good to see that you are reaccelerating growth initiatives. Do you feel that that’s something that will help business versus a lot of your much bigger competitors?

Chris Loughlin

I don’t think we think that; there is no why we are doing it. We are doing it because it’s right thing to do and we want to continue to grow our business and grow our profitability and our revenues, but also to service our subscribers. We have 100,000 subscribers at Nashville; we are not currently serving Local Deals. We would like to service them with Local Deals and I think what will help us in the competitive landscape is once these businesses start to rationalize, then become normal, then it will become much more even playing field.

I give you a story; we were trying to seek a candidate in one of our markets. The candidate currently works at one of the other companies and we gave a reason. We offer a very attractive offer and the competitor responded with an offer that I think was somewhere in the region of five times greater in terms of potential income for this individual. And almost that income level, the person was in his mid-20s would have been equivalent to that of a top level executive at our company and that is just not sustainable, because we know what the margins are, it’s just not realistic.

And so when you see that kind of behavior in an environment or there was another example, we did lose a restaurant in New York City; why, because one of these competitors came in and they offered the merchant zero take rate and to give them a free Billboard.

So that’s obviously not, that’s not sustainable. When that stuff stops which it will, then we feel super confident about our ability to play aggressively on the field. We saw it back in ’98 through to 2002 and you saw that Travelzoo came out of that period as a very strong internet media company. We feel that we’re almost through it and we’re quite excited.

Ed Woo - Ascendiant Capital

And then the other question I had is on Fly.com, I noticed recently that you guys expanded beyond the air fares; how is Fly.com working?

Chris Loughlin

We are very pleased with Fly.com and Glen do you have any further comments?

Glen Ceremony

No, we’re very pleased with Fly.com. I think in Europe they got launched later and we are pleased with the current progress on that as well.

Chris Loughlin

The really cool piece of integration that is if you go to Travelzoo website and you look at today’s best fares, it’s really and we’re getting a lot of buzz for that tool. There is a fare that comes from Fly.com site; if you live in New York and you just want to say, okay, what the best fares today; you’re not necessarily departing today, but they are available in the airline systems today that’s why you would find these deals.

And so that’s a great service; a lot of positive feedback. And as an example of synergy, we think about synergy a lot in our business; if you look at the Local Deals business in Europe approximately 40% of the Local Deals that we ran in Q1 were inside hotels. In US, about 20% of the deals that we ran were inside hotels. So we are always thinking about that and Fly.com does provide synergy as at Local Deals or back to the core.

Ed Woo - Ascendiant Capital

So you are pleased with their launch of the new hotel and a car rental product?

Chris Loughlin

Yes, we are still testing these out. But we are pleased with the general progress of Fly.com. We are also testing calendars now in the UK, we are quite pleased with that innovation and we will continue to make progress with the product and use redemption.

Ed Woo - Ascendiant Capital

Great and the last question I have is you mentioned how the online travel advertising market was a little bit challenged, but how do you characterize the overall travel industry right now?

Chris Loughlin

I don't know really, I mean it's actually a large question. I characterize it as uncertainty in Europe.

Ed Woo - Ascendiant Capital

Let me repeat, do you see any issues with the economy, do you see bookings up, do you see people excited, do you see hotel’s bookings increases or it fits your anecdotal views of the travel world?

Chris Loughlin

My impression is that, Ed, I have been out to quite a few client meetings recently. There's clearly a great deal of uncertainty in Europe. There are some one-time events occurring in the UK this year with the Jubilee and the Olympics. Spain did benefit last year from the trouble in North Africa.

So actually that business was somewhat booming last summer in Spain but let's see what happens now and we all got the copy of the journal this morning. We could see there's more uncertainty in Europe on the road ahead.

In North America it feels people are still rather pensive, but will travel and it's more a seasonal issue and also that maybe slightly slower growth expectations for some of the independent travel companies that are privately owned than a heavy growth and if you all go back to Q1 last year and how the world was feeling Q1 last year, I think it was a little bit different to how people felt this year. It was perhaps more optimistic

Operator

Our next question is from Ryan Bergan of Craig-Hallum.

Ryan Bergan - Craig-Hallum

Hi, I am not sure what more there is to pick at here, but I just want to get a clarification on the headcount ramp, if you are seeing growth in your revenue or if you are seeing a lack of you know more robust growth like you saw in 2011 in revenue, do you still see the headcount growing at the pace that you've outlined in the slide deck. Or is it more if there is a slower revenue, do you see it kind of slowing the headcount hiring.

Chris Loughlin

I think we will add people and we’re not going to see these people become productive immediately, that’s not realistic. But overtime they will become productive and we’ll launch the [COHO] group and we watch it very carefully and as we see green shoots, we continue to add and add and add. We know what the opportunities are. I mentioned Nashville but there is also Charlotte, we could still do a heck of lot more down in Florida on the Local Deals side, but also in hotels. And we need to spend more time focusing on developing new business. I was very excited, the last year we developed new business with the Atlantis Resort directly. They worked with us again in Q1 of this year. But these relationships take time to build and you need people focused on them. So that’s sort of how we will approach it.

Ryan Bergan - Craig-Hallum

So you are saying it independent of any growth in the revenues or a growth rate in revenue?

Chris Loughlin

Well the revenue will come as you add the people, so it's sort of a chicken and egg right, you can’t just grow revenue without adding the people or growing the subscribers or introducing products. Yes, we could do a better job than we did in Q1, I think with the existing group that we have, but yes, we would continue to add people as we see productivity continuing to improve.

Glen Ceremony

Yeah, one thing I want to add Ryan is, we feel like we are in a much better position than at this time last year we were adding a lot of people through Q1, Q2. I think there was a lot of learnings from that on tracking productivity and getting expectations as far as what that productivity should be and how long the ramp is. So we will use those learnings and monitor it along the way.

Ryan Bergan - Craig-Hallum

I want to switch over to Europe operating expenses, it was down year-over-year, I think you had said that it was more of a reflection of the slower core travel, the new business in Europe. Do you see any further expenses coming out of that, independent of any core travel challenges that you see over there?

Chris Loughlin

Glen, would you answer that?

Glen Ceremony

On the expense side you are referring to?

Ryan Bergan - Craig-Hallum

Yes.

Glen Ceremony

Yeah. I mean, as a percent, as that business scales, the percent of revenue and other expenses will obviously go down, so we did see that. And as far as taking it, we are not active though we are trying to take out expenses; we are making sure we apply additional expenses where we feel like there is growth opportunity. So, there is no, I would say the trend right now is just to cautiously invest and make sure we are making sure that we have those investments for future growth.

Chris Loughlin

Operator, I think we have completed the call now.

Operator

Thank you, sir. I will now like to turn it back over to Mr. Loughlin.

Chris Loughlin

Ladies and gentlemen thank you for your support. We look forward to speaking with you next quarter. Have a nice day.

Operator

Ladies and gentlemen thank you for your participation. That concludes the teleconference. You may disconnect and have a wonderful day.

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