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Executives

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

Wayne Lee - Chief Financial Officer

Christopher Loughlin - Executive Vice President - Europe

Raymond Ng - Executive Vice President, Asia

Shirley Tafoya - President, North America

Analysts

Analyst for Marianne Wolk - Susquehanna

Edward Woo - Wedbush Morgan Securities

Michael Millman - Soleil Securities

Travelzoo Inc. (TZOO) Q2 2008 Earnings Call July 24, 2008 5:00 PM ET

Operator

Good afternoon, everyone and welcome to the Travelzoo second quarter 2008 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. Sir, you may begin.

Ralph Bartel

Thank you, Operator. Good afternoon and thank you all for joining us today for Travelzoo's second quarter 2008 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; Shirley Tafoya, President North America; Chris Loughlin, Executive Vice President Europe; and Raymond Ng, Executive Vice President Asia.

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

Wayne Lee

First, we will discuss the company’s second quarter 2008 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 the company’s Q2 2008 results.

Ralph Bartel

Today Travelzoo announced its results for the second quarter of 2008. Diluted loss per share for Q2 2008 was $0.08, down from diluted earnings per share of $0.17 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 168%.

Our revenue increased to $21.8 million in Q2 2008, an increase of 8% over revenue of $20.1 million in the same period last year. Quarterly sequential revenue increased 4% from Q1 2008 to Q2 2008.

The publications and products that contributed to our revenue are the Travelzoo websites in Australia, Canada, China, France, Germany, Hong Kong, Japan, Spain, the U.K., and the U.S.; the Travelzoo network in the U.S.; the top 20 newsletters in Australia, Canada, China, France, Germany, Hong Kong, Japan, Spain, the U.K., and the U.S.; and Newsflash alert services in Canada, Germany, the U.K. and the U.S.; and Super Search in the U.K. and the U.S. The Travelzoo website in Taiwan did not generate any revenue in Q2 2008.

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 2.8 million ratings from Travelzoo users and makes it very easy for users to find the websites from suppliers that offer the best prices and connections for specific dates.

The Travelzoo Network is a network of third-party websites that lists travel deals published by Travelzoo.

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

Wayne Lee

Thank you, Ralph. Our North America business segment revenue in Q2 2008 was $19.2 million, an increase of 3% year over year. Our Europe business segment revenue in Q2 2008 was $2.6 million, an increase of 71% year over year. Our new Asia-Pacific business segment generated $90,000 of revenue in Q2 2008.

In terms of revenue concentration, Travelzoo had one group of advertisers under common control that accounted for 11% of revenue in Q2 2008. No other group of advertisers accounted for 10% or more of revenue.

Travelzoo's operating income in Q2 2008 was $1.7 million, a decrease of 71% compared to Q2 2007 operating income of $5.8 million.

Operating margin in Q2 2008 was 7.7%, down from 28.6% in Q2 2007.

Travelzoo's net loss in Q2 2008 was $1.2 million, down from Q2 2007 net income of $2.8 million. Reported net income was negatively impacted by an increase in our effective income tax rate.

Travelzoo's effective income tax rate in Q2 2008 was 168.1%, compared to 164.2% in Q1 2008 and 54.2% in Q2 2007. The increase in our effective tax rate compared to Q2 2007 was due primarily to the increase in the losses from our Asia-Pacific and Europe business segments. For financial reporting purposes, the $5.2 million in losses in Q2 2008 from our Asia-Pacific and Europe business segments were treated as having no recognizable tax benefit.

Cash used for operations in Q2 2008 was $3.1 million.

DSOs, that’s days sales outstanding, as of June 30, 2008 was 49 days, unchanged from March 31, 2008.

Total cash and cash equivalents as of June 30, 2008 decreased to $21 million from $24.4 million as of March 31, 2008.

In terms of headcount, Travelzoo had 191 employees as of June 30, 2008, up from 113 employees as of June 30, 2007 and up from 157 employees as of March 31, 2008. As of June 30, 2008, 103 of our employees were in North America, 44 employees were in Asia-Pacific, and 44 employees were in Europe.

Average annualized revenue per employee in Q2 2008 was $456,000, down from $712,000 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 expense in Q2 2008 was $7.6 million, down from $8.7 million in Q2 2007 and down from $8.6 million in Q1 2008.

Sales and marketing expenses as a percentage of revenue decreased to 39.9% in Q2 2008 from 46.7% in Q2 2007. The decrease from Q2 2007 was primarily due to decreased spending on marketing for SuperSearch, decreased spending on subscriber acquisition campaigns, and decreased spending on brand marketing campaigns, offset by increased salary expense. The decrease from Q1 2008 was primarily due to decreased spending on marketing for SuperSearch, decreased spending on subscriber acquisition campaigns, and decreased spending on brand marketing campaigns, offset by increased spending on trade marketing.

In North America, general and administrative expense was $4 million in Q2 2008, up from $2.4 million in Q2 2007 and up from $3.6 million in Q1 2008. The increase from Q2 2007 was primarily due to a $1.2 million increase in salary expenses.

North America operating profit for Q2 2008 was $6.9 million, down from $7.3 million for the same period last year.

Operating margin for Q2 2008 was 36.1%, compared to 39.1% for the same period last year.

For our Asia-Pacific business segment, which consists of our operations in Australia, China, Hong Kong, Japan, and Taiwan, total sales and marketing expense in Q2 2008 was $1.9 million, up from $1.6 million in Q1 2008. The increase sales and marketing expense was due primarily to a $123,000 increase in salary and employee related expenses.

Asia-Pacific general and administrative expense in Q2 2008 was $1.4 million, up from $1.1 million in Q1 2008. The increase in general and administrative expense was due primarily to a $158,000 increase in professional services expense.

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 $3.2 million in Q2 2008, compared to an operating loss of $2.7 million in Q1 2008, and an operating loss of $400,000 in Q2 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 expense in Q2 2008 was $3 million, up from $2 million in Q2 2007 and down from $3.1 million in Q1 2008. The increase from Q2 2007 was primarily due to a $496,000 increase in salary expense, a $259,000 increase in search advertising, and a $193,000 increase in spending on subscriber acquisition campaigns.

In Europe, total general and administrative expense in Q2 2008 was $1.6 million, up from $658,000 in Q2 2007 and up from $1.1 million in Q1 2008. The increase from Q2 2007 was primarily due to a $370,000 increase in salary expense.

Travelzoo began operations in Germany in September 2006, in France in March 2007, and in May 2008 began publishing our website and weekly top 20 list in Spain, after having operated a sales office in Barcelona since November 2006.

Our Europe business segment incurred an operating loss of $2 million in Q2 2008, compared to an operating loss of $1.2 million in Q2 2007. Though revenues increased by $1.1 million, the operating loss increased as both sales and marketing and general and administrative expenses increased.

This concludes our discussion of Travelzoo's Q2 2008 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. I will begin with information on subscribers. During Q2 2008, Travelzoo added a total of 944,000 new subscribers to its e-mail publications. In North America, we acquired 349,000 subscribers at an average cost of $3.39 per subscriber in Q2 2008, compared to 297,000 subscribers at an average cost of $4.97 in Q1 2008.

In North America, Travelzoo's Top 20 Newsletter and Newsflash e-mail alert service had a net unduplicated total of 11.1 million subscribers as of June 30, 2008. This represents an increase of 2% versus the same time last year, while revenues increased 3% year over year.

In Asia-Pacific, we acquired 369,000 subscribers at an average cost of $3.37 in Q2 2008, compared to 393,000 subscribers at an average cost of $3.12 per subscriber in Q1 2008.

Travelzoo's Top 20 Newsletter and Newsflash e-mail alert service had a net unduplicated total of 913,000 subscribers as of June 30, 2008.

In Europe, we acquired 226,000 subscribers at an average cost of $4.89 per subscriber in Q2 2008, compared to 362,000 subscribers at an average cost of $3.90 in Q1 2008.

In Europe, Travelzoo's Top 20 Newsletter and Newsflash e-mail alert service had a net unduplicated total of 1.9 million subscribers as of June 30, 2008, an increase of 99% versus the same time last year.

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

In 2005, Travelzoo began its growth strategy of expanding into selected international markets. With the launch of the Travelzoo brand in several markets in Asia-Pacific and in Europe, we are executing this strategy according to our plans. The strategy consumes significant financial and management resources. However, we believe that going global represents an attractive opportunity to increase shareholder value in the long-term. Markets in Asia-Pacific and Europe are new revenue opportunities for Travelzoo.

Also, 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 forces 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 bring Travelzoo users the very best information available.

In 2008, we also plan to continue expanding the Travelzoo network, a network of third-party websites that list travel deals published by Travelzoo. Further, we plan to expand our shows and events content. Finally, we plan to launch a meta-search product this year.

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) We’ll take our first question will come from Marianne Wolk with Susquehanna.

Analyst for Marianne Wolk - Susquehanna

Good evening. It’s Melinda Davies for Marianne. I had a couple of questions; first, I was hoping you could comment further on subscriber acquisitions. Last quarter you mentioned you were using some new channels and I was wondering if there was any update on this and if you could talk about what channels had been most effective for you?

Also, what are some of the different challenges for subscriber acquisitions in the U.S. compared to Europe and Asia?

Also related, could you speak to the competitive landscape for travel advertising in the U.S. and Asia?

And then lastly, you just mentioned the launch of a meta-search product and I was wondering if you could explain briefly how that product will be different from the SuperSearch product. Thank you so much.

Ralph Bartel

Thank you for your questions. I suggest that first, Chris in Paris and then Raymond in Hong Kong will provide more information on subscriber marketing, and then I will ask Shirley Tafoya in Silicon Valley to provide more information on the competitive landscape for travel advertising in the U.S., followed by Raymond providing information for the Asia-Pacific region, and then finally Shirley will provide information on the meta search product. Chris, could you please start with an update on subscriber marketing in Europe?

Christopher Loughlin

So in Europe, we haven’t really fundamentally changed our strategy apart from in Germany, we switched to an agency that has a stronger buying power in the market. There isn’t really anything fundamentally different. Of course, we’re not going to disclose how we acquire subscribers because there are many competitors who would like to know that, too. I believe that’s really all the information I can give on that.

Raymond Ng

This is Raymond in Hong Kong. We [inaudible] Hong Kong [inaudible] late in 2007, and the rest of those, others in Japan, in Taiwan, in China, in December 2007, so with everything six months or less in operations, actually we still are in the mode of testing the market, how we can utilize the different channel, and right now we have over 900,000 subscribers as a whole in Asia-Pacific. I think we are executing as planned and will continue to do a lot more new tests in the market and try to get more subscribers in as we execute the plan.

Ralph Bartel

Shirley, please could you comment on competitive landscape of travel advertising in the U.S.?

Shirley Tafoya

Sure. We’re always watching our competitors here in the U.S. We believe that we actually have a better product, just because of the unique features we put into our product with our production force. We actually believe that the localized content approach that we take with producers in every area of the country actually produced richer content, as well as our globalized approach as a company that is providing a better solution for our advertisers.

Ralph Bartel

Raymond, could you please add information for Asia-Pacific concerning the competitive landscape for travel advertising?

Raymond Ng

Yes, thank you, Ralph. In Asia, we just, as I just mentioned, we started the operation with a very soft return, so right now when we look at it, we continue to hire and train very professional producers to provide travel information as they have a very good travel related experience, so we do see that we excel in this area, providing for good information.

So when we look at the rest of the market, we do not see similar products and services. We see it as unique in the market.

Ralph Bartel

Thank you, Raymond. Finally, Shirley, could you please provide more information on meta search product launch, please?

Shirley Tafoya

Sure. We’re developing a meta search product, just because we believe that development of this type of product will better address the needs of airlines as an advertiser, provide them with a better solution, as well as provide better content for our subscribers as well.

Ralph Bartel

Thank you, Shirley.

Operator

Thank you. We’ll take our next question from Ed Woo with Wedbush.

Edward Woo - Wedbush Morgan Securities

I noticed that it looks like in Asia and Europe, the subscriber growth was down sequentially from Q1. Was there any trends driving that?

Ralph Bartel

Hello, Ed. Welcome to our call. Chris, could you please comment on Ed’s question for Europe, and then Raymond, could you please provide more information on Asia-Pacific?

Christopher Loughlin

Actually, no, that was a -- in Europe, that was a decision on purpose to control the spend. At certain points, we can increase our rates. For example in the U.K., we now have -- well, we actually have over a million subscribers but we sell at approximately 900,000, and we didn’t really need to push much further beyond the million marker, so we slowed it down there. We also had in Germany quite some executive recruitment and that includes stock cost in Germany, so we took the decision to subsidize that [inaudible] -- if you like, subsidize that by holding back a little bit on subscriber acquisition.

Raymond Ng

In Asia, we have a slightly decrease in [inaudible] acquiring subscribers. This is due to we started to implement starting in Q2 a [confirming process] that subscribers need to go back to the e-mail inbox to confirm the [inaudible]. So this I believe will give us a better quality of subscribers. I do see that this is a very positive sign. Thank you.

Ralph Bartel

Ed, does this answer your question?

Edward Woo - Wedbush Morgan Securities

Yes, and then the last question I have is has any of the consolidation in the airlines or with the macro concerns in the U.S., have you seen any changes in any of your customers?

Ralph Bartel

Ed, Shirley Tafoya will take your question. Shirley, please.

Shirley Tafoya

I’m sorry, Ed, could you repeat that again?

Edward Woo - Wedbush Morgan Securities

Sure. We’ve been hearing about airlines cutting capacity or going out of business in the U.S. Has the full macro environment, high oil prices, affected your customers?

Shirley Tafoya

Yeah, in this type of environment, it does affect your customers but we believe that these types of mergers are good for the industry, just because it overall strengthens and allows the airlines to actually raise their prices. What we are finding is that in the airline sector, it’s actually affected other sectors of the travel industry, like hotels because people might not be jumping on an airplane and traveling very quickly. The hotels still have capacity that they still need to fill.

So in our business, historically the downturn in the economy and things like this traditionally are advantageous because it’s usually the suppliers need more help in filling inventory, whether it’s on airplanes or hotels.

Ralph Bartel

Ed, I would like to add to what Shirley says and confirm that over the years, we have seen that disruptions in the industry or changes or economic downturns or significant currency exchange rate fluctuations, that’s all -- these are all positives for us, for our business. Why, as Shirley said now in the U.S., the airlines are cutting capacity but that also means that there are less flights, there’s less business travel, so what we are seeing already is that occupancy rates of hotels decrease and we are seeing strong demand from hotel advertisers and when occupancy rates of hotels decrease, then hotels often they turn to a very effective advertising solution like Travelzoo.

Christopher Loughlin

Ed, if I just may give you one little example there, in the last three weeks, we promoted an American brand hotel in Venice and we helped that hotel in Venice in Italy, achieve $100,000 worth of room night revenue, predominantly from American guests. So that’s really interesting stuff because we are not offering the subscribers flights or packages. We’re merely telling them about a hotel in Venice. We also were able to promote that in Spain, France, Germany, and the U.K. in different languages and get that out all within the same day, so you can see that the global strategy starts to pay off.

Edward Woo - Wedbush Morgan Securities

Great. Thank you.

Operator

(Operator Instructions) We’ll talk our next question from Michael Millman with Soleil Securities.

Michael Millman - Soleil Securities

Following up on the last question, or series of questions, I was wondering if you are seeing a change in the number of advertisers. You indicated that you were seeing an increase in hotel advertising. Can you talk about whether you are seeing increases in other sectors in online advertising, or third-party advertising?

And then on the other side of the coin, I suppose, is can you talk a little bit about what you are seeing in subscriber demand? Are you seeing a change in [the portion] of subscribers buying the ads or are you seeing -- more advertising gets the same amount of subscriber buying?

Christopher Loughlin

Ralph, if I may help you on that question, we recently ran a study in Europe which addresses that.

Ralph Bartel

Thank you, Michael, so Chris will first provide more information on what trends we are seeing from users and then after Chris, Shirley will provide more information on trends we are seeing with our customer base. Chris, please.

Christopher Loughlin

We ran a survey in 2006 in the U.K. and approximately 18% of our subscribers that they actually booked something. Now that’s up to 36% of subscribers who say they actually -- sorry, up to 39% who actually said they booked something. So the trend is quite positive in that respect.

Also, what we are seeing, and we released this information in a press release several weeks ago, that the click rates actually have increased in Europe, so now on a like-for-like basis, you actually see people are clicking more, particularly in the U.K., than they were at this time last year.

We think that that is because in the U.K., you’ve got the same problems as the U.S. with the housing market and so forth now, and consumers are really looking for a deal. People in the U.K. are tending to travel domestically and of course, petrol plant prices are extremely high in the U.K.

Shirley Tafoya

And I will take the second part of that, is that what we are seeing is a lot of our advertisers actually moving from -- moving a lot of their brand dollars into more tactical areas, like Travelzoo and online to really drive performance. So we’ve been seeing that across the board this year. We’re also, because of some of the things happening in the market, we’re also seeing the deals actually get better and better because of the need for the suppliers to fill inventory. With that, you get kind of a reactionary approach from the subscribers in that they are more enticed by the offers because the offers are getting richer and with higher value, so naturally we see a little bit more activity coming from the subscribers with some of the things that are happening.

Operator

Thank you. And at this time, there are no further questions. I’ll turn the call back over to Mr. Bartel.

Ralph Bartel

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

Operator

Thank you, ladies and gentlemen. This concludes today’s teleconference. You may disconnect your lines at this time and have a nice day.

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