Travelzoo Q4 2007 Earnings Call Transcript

| About: Travelzoo Inc (TZOO)

Travelzoo Inc. (NASDAQ:TZOO)

Q4 2007 Earnings Call

February 5, 2008 5:00 pm ET

Executives

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

Wayne Lee - Chief Financial Officer

C. J. Kettler - President, North America

Christopher Loughlin - Executive Vice President - Europe

Holger Bartel - Executive Vice President, Director

Analysts

Michael Millman - Soleil Securities

Bill Lennan - Broadpoint Capital

Operator

Good afternoon, everyone and welcome to the Travelzoo fourth quarter 2007 financial results conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Ralph Bartel, Travelzoo's Chairman and Chief Executive Officer. You may begin, sir.

Ralph Bartel

Thank you, Operator. Good afternoon and thank you all for joining us today for Travelzoo's fourth 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 C. J. Kettler, President, North America; and Christopher Loughlin, Executive Vice President Europe.

Wayne Lee

Hello, everyone. Welcome to our conference call.

C. J. Kettler

Good afternoon, all.

Christopher Loughlin

Welcome, everybody.

Ralph Bartel

Before we begin, Wayne will walk you through today’s format.

Wayne Lee

Thank you, Ralph. We will first discuss the company’s fourth 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.

I will now turn to Ralph for an overview of Q4 2007 results.

Ralph Bartel

Today Travelzoo announced its results for the fourth quarter of 2007. Diluted earnings per share for Q4 2007 were $0.00, down from $0.26 in the prior year period. Our financial results were impacted by non-tax deductible losses from our foreign operations in Asia-Pacific and Europe, resulting in an effective income tax rate for Travelzoo of 98.3%. Our revenue increased to $19.1 million in Q4 2007, an increase of 8% over revenue of $17.7 million in the same period last year.

Quarterly sequential revenue decreased 4% from Q3 2007 to Q4 2007. The publications and products that contributed to our revenue are the Travelzoo website in Canada, Germany, the U.K., and the U.S.; the Travelzoo network in the U.S.; the top 20 newsletters in Canada, France, Germany, the U.K. and the U.S.; the Newsflash alert services in Canada, the U.K. and in the U.S.; and Super Search in the U.K. and in the U.S.

The Travelzoo websites in Japan, Taiwan, and China did not generate any revenue as of the end of Q4.

Our publications and products provide latest and reliable information on the very best travel offers from hundreds of travel companies. Super Search is a travel search tool that leverages more than 2.5 million ratings from Travelzoo users and makes it very easy for users to find websites from suppliers that offer the best prices and connections for specific dates.

The Travelzoo Network is an affiliate network of partners that list travel deals published by Travelzoo.

I will turn now to Wayne to discuss additional information for the group and for our three business segments -- North America, Asia-Pacific, and Europe, including headcount, expenses, and operating income.

Wayne Lee

Thank you, Ralph. Our North America business segment revenue in Q4 2007 was $17.7 million, an increase of 6% year over year. Our Europe business segment revenue in Q4 2007 was $1.5 million, an increase of 52% year over year. Our new Asia-Pacific business segment generated $8,000 of revenue in Q4 2007.

In terms of revenue concentration, Travelzoo had one group of advertisers under common control that accounted for 13% of revenue and another group of advertisers under common control that accounted for 10% of revenue in Q4 2007. No other group of advertisers accounted for 10% or more of revenue.

Travelzoo's operating income in Q4 2007 was $2.5 million, a decrease of 68% compared to Q4 2006 operating income of $7.7 million. Operating margin in Q4 2007 was 12.8%, down from 43.5% in Q4 2006. Travelzoo's net income in Q4 2007 was $46,000, down from Q4 2006 net income of $4.3 million. Reported net income was negatively impacted by an increase in our effective income tax rate.

Travelzoo's effective income tax rate in Q4 2007 was 98.3% compared to 59.5% in Q3 2007 and 46.3% in Q4 2006. The increase in our effective tax rate compared to Q3 2007 and Q4 2006 was due primarily to the increase in the losses from our Asia-Pacific and Europe business segments. For financial reporting purposes, the losses from our Asia-Pacific and Europe business segments and the cash program expenses were treated as having no recognizable tax benefit.

Cash used from operations in Q4 2007 was $129,000.

DSOs, that’s days sales outstanding, as of December 31, 2007 was 49 days compared to 45 days as of September 30, 2007.

Total cash and cash equivalents as of December 31, 2007 decreased to $22.6 million from $23.3 million as of September 30, 2007.

We believe that Travelzoo continues to be a highly productive company. We had 157 employees as of December 31, 2007, up from 82 employees as of December 31, 2006 and up from 128 employees as of September 30, 2007. Ninety-five of the employees were in North America, 28 employees were in Asia-Pacific, and 34 employees were in Europe.

Average annualized revenue per employee in Q4 2007 was $487,000, down from $861,000 in the same period last year.

Let’s now look at the expense line items of our three 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 in Q4 2007 were $7.6 million, up from $6.5 million in Q4 2006 and down from $8.7 million in Q3 2007. Sales and marketing expenses as a percentage of revenue increased to 43% in Q4 2007 from 39% in Q4 2006. The increase from Q4 2006 was primarily due to increased spending on subscriber acquisition and brand marketing campaigns, and increased salary expenses associated with an increase in headcount, offset by decreased spending on marketing for SuperSearch. The decreased from Q3 2007 was primarily due to decreased spending on marketing for SuperSearch and decreased spending on subscriber acquisition campaigns.

In North America, general and administrative expenses were $3 million in Q4 2007, up from $1.9 million in Q4 2006 and up from $2.1 million in Q3 2007. The increase in general and administrative expenses versus last year and the prior quarter was due primarily to increases in professional services expense, increased salary expenses, and increased expenses for corporate functions.

North America operating income for Q4 2007 was $6.4 million, down from $8 million for the same period last year.

Operating margin for Q4 2007 was 36.3%, compared to 47.9% for the same period last year.

For our Asia-Pacific business segment, which consists of our operations in Hong Kong, Japan, Taiwan, China, and Australia, total sales and marketing expenses in Q4 2007 was $688,000, up from $193,000 in Q3 2007.

Total general and administrative expenses in Q4 2007 was $1.3 million, compared to $513,000 in Q3 2007. The increases in both sales and marketing and general and administrative expenses were as a result of the start-up of our operations in our Asia-Pacific business segment.

Travelzoo began operations in Hong Kong in April 2007, in Japan in September 2007, in China in October 2007, and in Australia and Taiwan in December 2007.

Our Asia-Pacific business segment incurred an operating loss of $2.1 million in Q4 2007, compared to an operating loss of $706,000 in Q3 2007.

In Europe, 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 in Q4 2007 was $2.1 million, up from $800,000 in Q4 2006 and flat compared to Q3 2007. The $1.3 million increase from Q4 2006 was due primarily to a $765,000 increase in spending on subscriber acquisition campaigns in the U.K., Germany, and for our new operations in France, as well as increased spending on search advertising and increased salary expenses associated with sales and marketing staff.

In Europe, total general and administrative expenses in Q4 2007 was $1.2 million, up from $496,000 in Q4 2006 and up from $893,000 in Q3 2007. The increases in general and administrative expenses versus last year and last quarter were due primarily to increased salary expenses, increases in rent and office expenses, and increases in professional services expenses.

Travelzoo began operations in France in March 2007. Our Europe business segment incurred an operating loss of $1.9 million in Q4 2007, compared to an operating loss of $356,000 in Q4 2006. Though revenues increased by $498,000, the operating loss increased as both sales and marketing and general and administrative expenses increased.

This concludes our discussion of Travelzoo's Q4 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 Q4 2007, Travelzoo added a total of 626,000 new subscribers to its e-mail publications. In North America, we acquired 280,000 subscribers at an average cost of $3.78 per subscriber in Q4 2007, compared to 385,000 subscribers at an average cost of $3.92 in Q3 2007.

In North America, Travelzoo's Top 20 Newsletter and Newsflash e-mail alert service had a net unduplicated total of 11 million subscribers as of December 31, 2007. This represents an increase of 8% versus the same time last year, while revenues increased 6% year over year.

In Asia-Pacific, we acquired 180,000 subscribers at an average cost of $2.90 in Q4 2007, compared to 42,000 subscribers at an average cost of $2.23 per subscriber in Q3 2007.

Travelzoo's Top 20 Newsletter and Newsflash e-mail alert service had a net unduplicated total of 214,000 subscribers as of December 31, 2007.

In Europe, we acquired 166,000 subscribers at an average cost of $5.85 per subscriber in Q4 2007, compared to 332,000 subscribers at an average cost of $2.96 in Q3 2007.

In Europe, Travelzoo's Top 20 Newsletter and Newsflash e-mail alert service had a net unduplicated total of 1.4 million subscribers as of December 31, 2007, an increase of 111% versus the same time last year.

The costs of our subscriber acquisition in North America, Asia-Pacific, and Europe are expensed as incurred.

In 2007, Travelzoo began its growth strategy of expanding into selected international markets. We see a competitive advantage from being able to cross-sell advertising globally. 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 and Asia-Pacific also sell inclusions for our U.S. and Canadian publications.

Another competitive advantage is our improved ability to source the best travel deals and perform a very high quality review by leveraging the local expertise. Over the last two years, we have built a unique global network of producers and sales staff in 11 countries -- Australia, Canada, China, Germany, Hong Kong, France, Japan, Spain, Taiwan, U.K., and the U.S. Our plan is to aggressively leverage this global network to provide Travelzoo users with the very best information available.

In 2008, we will focus on further developing our websites and expanding the Travelzoo network, an affiliate network of websites that list travel deals published by Travelzoo. Further, we plan to expand our shows and events section and we plan to continue testing the publishing of non-travel deals. We plan to launch the next generation of SuperSearch.

This concludes the discussion of the 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) Our first question will come from Michael Millman, Soleil Securities.

Michael Millman - Soleil Securities

Thank you. Could you talk about the impact you are seeing from things like I-Go, You-Go, and Trip Advisors in terms of their aggressive going after advertising? And sort of related to that, both of them or their parents going after transactions, advertising on transaction pages? Thank you.

Ralph Bartel

Hello, Michael. C.J. will take your question. C.J., please.

C. J. Kettler

Hello, Michael. Nice to meet you. It’s good to join the call. It’s my first time. We are always looking at what our competition is doing in the market place and have consistently watched folks like Travelocity in terms of how they’ve built their business and how they expand their business and move into areas like community and user ratings.

We believe that our newsletter business at Travelzoo is a much different kind of product and a better quality product in terms of what we provide. Our staff has a very deep expertise in the travel deal publishing model and a very strong track record for ROI amongst our advertisers.

We recently actually had a focus group and that was confirmed anecdotally in the focus groups that we have a subscriber base that looks forward to the kinds of deals that we publish continually in terms of the level of quality and the breadth of deals that we are able to provide, given our cross-global offerings.

Michael Millman - Soleil Securities

Have you changed or adjusted any of your offerings in light of what these others are doing?

C. J. Kettler

Well, I think like any good company, we continually seek to improve our products and diversify our revenue, so we are looking to expand some of our current offerings, so obviously our website but also looking at what we started in the shows and events category, as well as what we started to do in non-travel as well.

Michael Millman - Soleil Securities

Thank you. And one other -- one of the big search firms, Yahoo! the other day indicated that they were seeing some slowing in travel advertising. Do you see that at all?

C. J. Kettler

I think it’s very true that like the rest of the online advertising marketplace, we have seen a seasonal shift in the travel revenue on a macro level. I think that is typically occurring in Q4 because I realize and I think we all noticed that both Yahoo! and Google cited a downturn in those sectors specifically, in this sector specifically.

Michael Millman - Soleil Securities

Okay. Thank you very much.

Operator

(Operator Instructions) Next is Bill Lennan from Broadpoint.

Bill Lennan - Broadpoint Capital

Good afternoon. Looking at the two 10% customers, it looks like you are down pretty significantly year over year, maybe 13% or 14%. I wonder if you could tell us if that -- well, what’s behind that, whether its macroeconomic, competitive, or perhaps the customers deciding to spend their money in a different way?

And then secondly, I wonder if there is some sort of metric we can use -- I know you guys don’t give guidance. Are you willing to give an estimated headcount at the end of 2008 kind of number, so we can back into some expenses at least? Thanks.

Ralph Bartel

Hello, Bill. Ralph here. I will take your questions. Regarding your question about individual clients, it’s our policy not to comment on individual clients and their advertising decisions.

Regarding the question of headcount, of course we have an operating budget for North America and for Asia-Pacific and for Europe and we have budgeted headcount. Again, we prefer not to share this information on a public conference call, or sharing it with anyone outside the company.

Bill Lennan - Broadpoint Capital

Okay. Any thoughts on where the cost to acquire customers will trend in Europe and Asia? You know, [starting to see things starting with a 5] -- are we near the top of your costs in Europe?

Ralph Bartel

Bill, I suggest that Christopher Loughlin from Europe will take your question regarding subscriber marketing in Europe and then I will comment on Asia-Pacific. Chris, please.

Christopher Loughlin

Hi, Bill. Thanks for your question. One thing you’re seeing in Europe in Q4 is a seasonal slowdown. If you look at every Q4, so in 2006 and 2005, the leap from Q3 to Q4 is always about 100%, so there is a Q4 effect there. There are fewer deals in the market which make it perhaps less attractive in our advertising.

The other thing that happened in Q3 and Q4 in Europe, we decentralized the organization. So we had a head of marketing in Europe who was based in London and we decided to decentralize and appoint local marketing managers in each of the countries because having an English person or an American person in London dictating into Germany or France didn’t make sense, so we’ve seen some good results in France where we implemented that strategy first. And we have to see how that rolls out now into the coming months.

Bill Lennan - Broadpoint Capital

Okay, thanks.

Ralph Bartel

Bill, let me comment on Asia-Pacific. You asked about that as well. In Asia-Pacific, the average cost of acquisition per subscriber went up from $2.23 to $2.90 from Q3 to Q4. We think it’s too early to see a trend so we cannot comment how this will develop in 2008. Of course, we are always optimistic that by understanding the market better and training the local staff and gaining experience that we can ultimately do a very good job.

Something I would like to point out -- if you do business in a market like China and Travelzoo is very excited about doing business in China for various reasons, but keep in mind that in these markets, you have to target your advertising campaigns very much. So that’s probably in China -- let’s say a 2% segment of the population that would make very high quality subscribers for Travelzoo newsletters, so our advertising campaigns and our marketing campaigns will go after that segment. And that comes with higher advertising rates, so pleased to not expect CPAs of $0.10 or $0.20 per subscriber in a market like China.

Bill Lennan - Broadpoint Capital

I had one final one and then I’ll get out of the way -- do you think at this juncture in early ’08, do you think at some point you will turn a profit in Europe and use this tax rate issue somewhat?

Ralph Bartel

I would like to ask Chris to comment on this question. Chris Loughlin from Europe.

Christopher Loughlin

Yes, Bill, we are very pleased with our progress in Europe, particularly in the U.K. And we don’t disclose -- we don’t break out the groups and give indication on where we will be, but all I can say is that I think we are generally pleased with the progress in Europe. Perhaps Wayne Lee could add further comment there.

Wayne Lee

As you know, we report our financial results by business segment, as this is how management reviews and evaluates the performance. So therefore, I can’t give any additional comment on profitability of individual countries.

Bill Lennan - Broadpoint Capital

Thank you.

Operator

That does conclude the question-and-answer session. Mr. Bartel, I’ll turn things back over to you.

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 does conclude today’s teleconference. You may now disconnect your lines at this time. Have a great day.

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