Travelzoo's CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: Travelzoo Inc (TZOO)
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Travelzoo Inc. (NASDAQ:TZOO) Q2 2012 Earnings Call July 19, 2012 11:00 AM ET


Christopher Loughlin – Chief Executive Officer

Glen Ceremony – Chief Financial Officer


Edward Woo – Ascendiant Capital Markets

Daniel Kunros – The Benchmark Company


Good morning everyone and welcome to the Travelzoo Second 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 to questions following the presentation. Today’s call is being recorded.

It is now my pleasure to turn the floor over to your host Chris Loughlin, Travelzoo’s Chief Executive Officer. Sir, you may begin.

Christopher Loughlin

Thank you, operator. Good morning and thank you for joining us today for Travelzoo’s second quarter 2012 financial results conference call. I’m Chris Loughlin, Chief Executive Officer. With me today is Glen Ceremony, the Company's Chief Financial Officer.

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 Forms 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 Please refer to our website for important information, including our earnings press release issued earlier this morning, along with the slides that accompany today's prepared remarks.

And archive recording of this conference call will be available on the Travelzoo investor relations website at beginning approximately 90 minutes after the conclusion of this call.

For the format of today’s call, I will review our second quarter financial results and then Chris will provide an update on our strategy. Thereafter, we will conclude with a question-and-answer session. Now, please open our management presentation, which is available at

Turning to slide four, this provides you the key financial highlights for the quarter. We achieved revenue of $39.4 million this quarter which is slightly higher than prior quarter despite an expected seasonally slower quarter and up 5% year-over-year.

We achieved record earnings per share of $0.45, which is up 53% from our $0.30 earnings per share for the same period last year. And we had growth in new subscribers, helping the Travelzoo brand reach our 25 million worldwide subscriber milestone this quarter. These results are demonstration of our ability to operate a profitable company in a competitive landscape.

On slide five, we look at revenue by segment. Revenue in North America was $28.7 million representing a year-over-year growth rate of 4%. In Europe, revenue growth was 7% year-over-year, which is lapping high growth from last year. In local currency, Europe revenue growth was 10% year-over-year. We will provide some more insights on revenue in the next few slides.

Turning to slide six, as a reminder we break out our revenue by type. First category of revenue is travel. This includes the products our subscribers and advertisers have enjoyed 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 formats. This aligns with the way we manage our Getaways offerings along with our existing hotel advertising products included in travel.

The second category of revenue is search. This includes both our search products and SuperSearch. We continue to believe these tools are great complements to our business as both provide an easy way for our subscribers to comparison shop for airline, hotels, and car rentals. The third category of revenue is local. This includes both Local Deals voucher-based format, 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 event.

Now, let’s take a look at the revenue by type for each segment starting on slide 7. North America second quarter revenue broken down by type, shows travel decreasing sequentially by 6% and increasing 3% year-over-year. The sequential decrease is due primarily to seasonality. The year-over-year increase is due to the increase in our hotel business deals by our Getaways offerings offset by continued reduced spending by certain online travel agencies, as well as airline consolidation and competition.

North America Search second quarter revenue was flat sequentially and declined 6% year-over-year. While continued to grow, this was offset by declines in SuperSearch revenue caused by our reduced spend, some challenging pricing for traffic acquisitions and reduced spend by the airlines.

North America local revenue increased 16% sequentially and increased 15% year-over-year. Our management and sales force divisions continue to build-out a foundation for continued growth. The metrics for us continued to be stable with our deals now reaching 125 markets, an average deal size of approximately 25,000 and almost half the purchases made up of repeat buyers.

Turning to slide 8, you see the breakdown of revenue for our Europe segment. Europe travel is showing a 2% sequential growth and 8% year-over-year growth despite a tough economy and competitive landscape. We’re pleased to see the sequential growth in what normally is a down quarter. This was in part the results of our efforts to get additional sales staff in place early in the quarter.

Europe Search declined sequentially and year-over-year 22% and 24% respectively due primarily to our reduced spend on traffic and reduced spend by airlines.

Europe local was flat sequentially and grew 28% year-over-year. This quarter was impacted by the extra holidays, such as Easter and the Jubilee. You can see further history of our quarterly revenue by type and the appendix to this presentation. Overall, we would like to be delivering higher revenue growth. We’re confident with the right investments and sales staff and audience we can serve future top line growth.

Slide 9 provides more detail on our operating income. We achieved record operating income of $10.4 million, of this total North America contributed a record of $7.8 million, while Europe contributed record profits of $2.6 million. This was our sixth consecutive quarter of profitability in Europe.

Our income tax expense of $3.1 million, lead components led to a record quarter net income of $7.3 million at record quarterly EPS of $0.45.

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. Cost of revenue declined sequentially due primarily to lower subscriber refund.

On the right, you can see that our operating margin sequentially increased. This was driven by lower cost of revenue and legal and professional fees. We expect legal and professional fees to increase in the second half of the year. Year-over-year, operating margin increased significantly due to a $2 million reduction in TV advertising. This profitability provides us with the opportunity to fund future investments to spur future top line growth such as investing in sales, head count and marketing spend, which Chris will talk more about in the strategy section.

Slide 11 captures our operating expenses. As a percent of revenue North America decreased due primarily to a $2 million reduction in TV advertising. Europe operating expenses as a percent of revenue decreased due to decreased marketing spend as we focused more on ramping up of our sales force.

Slide 12, shows that our head count increased from 360 to 374 this quarter. We continued our hiring this quarter and have 10 additional sales staff signed up to start after June. We are on track with our goal of hiring 50 additional sales staff that we set at the end of Q1. We intend to continue to hire while focusing on productivity.

Turning to slide 13, you can see that we’re maintaining our strong collections and growing our cash balance. We ended the quarter with $54.2 million in cash and cash equivalents. This was up from prior quarter as a result of our operating cash flow of $7.1 million demonstrating our strong financial position.

On slide 14, our financial results for this quarter are summarized. We achieved across-the-board record revenue and record operating income including for each of our business segments, and we reached a record quarterly EPS. This strong profitability and cash position will service well as we look to increase our investments in our business to spur top line growth.

So that wraps up the financial summary for our second quarter. Now, Chris will cover some highlights regarding Travelzoo growth strategy.

Christopher Loughlin

Thank you, Glen. So let’s turn to slide 16, which captures the essence of our business model. On the one hand, we’re growing our audience, which you can see on the x-axis; on the other hand, we’re introducing new products to grow our revenue per subscriber over the time, which you can see on the y-axis. Over the last few years our growth has come from the introduction of Local Deals and Getaways. This has been transformative for our company engaging us more directly with our subscribers and expanding the breadth of our offering.

Despite the success of Local Deals and Getaways, our top line revenue has slowed. This is due in part to the fact of overlapping a period of rapid expansion, but also due to reduction in spending by airlines and online travel agencies, a tough environment in Europe and increased competition.

While we’re disappointed about this lower top line growth, we’re confident in our industry position as high quality leader and we’re pleased with our objective of consistent earnings growth amid an industry of loss makers. We now find ourselves in the enviable position of being able to invest in future growth while returning profits.

Our four strategic elements, which we believe will spur future growth, are, to ramp up our sales force and improve productivity, which you already see that we’re doing. We accelerate scriber growth through incremental investment, invest in product innovation and subscriber engagement to capture more of the opportunity, leverage the Travelzoo network to further distribute local deals and getaways. And I’ll give you an update on our plan around these strategic elements in the next few slides.

Turning to slide 17, this provides you an update of our sales force hiring efforts. Last quarter, we set a goal of hiring 50 additional sales staff worldwide. We've made good progress this quarter by hiring over 30 sales staff, some of which did not stop by the end of the quarter, but will shortly. It will take approximately 6 months to 9 months for these sales staff to ramp up to full productivity, but we are pleased with our progress so far.

Slide 18 covers our next strategic element, which is to re-accelerate subscriber growth through incremental investment. This is a new strategic element that we are announcing today for the first time. We slowed our subscriber spend over the last 12 months to 18 months, to allow us to invest in new products and people. We feel that we’ve made good progress along our Y axis. So, now we intend to increase our investment in subscribers to spur growth along the X axis.

Our focus were beyond merely adding new subscribers to the count. Now we have deeper analytics because people have purchased with credit cards, [will be able] to look to attract certain types of subscribers and not just to cost e-mail, but also on mobile and social.

With this in mind, we’re planning on significantly increasing our marketing spend, by $3 million to $4 million per quarter for the next 18 months, which will reduce EPS by approximately $0.15 to $0.20 per quarter. Well, though are expectations, if these investments would take some time to reap rewards about 12 to 24 months. We believe this is the right investment, the long-term top line growth. With the ramping up in spending, we will likely see increase CPAs. These investments will be focused on key markets, where local deals are more prevalent in the U.S., UK, Germany and Canada.

Slide 19 captures our third strategic element, product innovation and subscriber engagement. Two years ago, we knew where our subscribers lived. Today, for those who purchased the local deal or a Getaway, we know more than 36 data points about them, such as agenda, income level, and family status.

We’re using this information to reinforce the quality of our audience to our merchants and in this case, where you can see a private club on top of the Willis Tower and we’re able to demonstrate 60% of the cash that we send to this establishment, are among the wealthiest people in America. This information changes the merchant relationship, builds trust and set us above the myriad of local deals companies and that’s why we’re now seeing businesses like this private members club and brand such as Nobu in Dallas joining us.

In time, we’ll use this information for further product innovation. In addition to subscriber analytics, we continue to invest in product innovation to address changing market demands. We launched Getaways to address both the opportunity and the desires of some of our hotels, not to pay an advertising fee upfront, but rather to pay upon performance.

We’ll further explore the needs of hotels for direct booking and we’re testing a commission model. In addition, we are investing in mobile. Our base mobile platform is now in live in all countries across iPhone, Android and Mobile. We received very positive reviews and are seeing rapid adoption. Mobile is now 25% of our traffic, up from 10% just a year-ago.

In the past quarter, we saw our mobile download count double to almost 1 million downloads, approximately 5,000 people a day downloading the Travelzoo apps. We have much more to do in mobile, but our early assets are positive and we’re confident that we are in an ideal content category for this medium.

Turning to slide 20, I want to share with you our four strategic element, which is to increase the distribution of our deals outside the Travelzoo subscriber base. For example, we have access to 65 million monthly unique users across websites such as The Los Angeles Times, Lonely Planet, PopSugar and the New York Times via the Travelzoo network. Historically, these sites have distributed our travel advertising deals. But in Q2, we saw some success with distributing local deals and getaways. We will be focusing more on this opportunity in the months ahead.

To wrap up on strategy, we believe that our profitable approach and strong focus on quality leadership combined with our four strategic growth elements positions us very well for long term future success and growth. We have an outstanding array of high quality deals across the three content categories that we serve local, entertainment and travel. We look forward to further expanding our coverage in these categories, while attracting a much larger following.

Moving on to the last slide 23, I want to conclude by summarizing our continued areas of focus for 2012 and 2013. First and foremost, we will maintain quality leadership in this space by publishing high-quality deals and tightening our brand control.

We plan to reaccelerate top line revenues by investing primarily in sales force ramp up and new subscribers and audience growth. We’ll continue to leverage subscriber analytics to deepen our level of product engagement and we’ll enhance some scale on new products particularly within mobile and hotels. And lastly, we plan to invest in future growth while remaining profitable.

As I pointed out earlier, we’re not satisfied with the recent slower top line growth. However, our solid profitability in balance sheet have put us in a position where we can confidently invest incrementally in our business to spur top line growth for the future.

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

Now, I’ll turn back to the operator for the question-and-answer session.

Question-and-Answer Session


Thank you. The floor is now opened for questions. (Operator Instructions) Our first question comes from Ed Woo, Ascendiant Capital.

Edward Woo – Ascendiant Capital Markets

Yeah. Thanks for taking my question. I had a question about guidance for increased investment in, I guess for the market in your mobile spending the $0.15 to $0.20 per quarter, do you think that’s going to be offset by revenue growth right away or do you think it’s going to be a slower ramp to catch up with that?

Christopher Loughlin

Good morning, Ed. Glen will answer this question.

Glen Ceremony

Hi. Yeah, there will be a lag. What we’ve seen in the past is it will be anywhere from 12 to 24 months for the revenue of those investments to really start kicking in. Obviously, that’s the majority of the ramp up is in that period, so I think we’ll see some in the near-term, but I would count on 12 to 24.

Edward Woo – Ascendiant Capital Markets

Was there any concerns in terms of doing such big job in investment, currently was this doing something more gradual or was this some type of opportunity that you see in the marketplace to stepping up just quickly?

Christopher Loughlin

Ed, may I just comment, and then Glen can comment also on this. We’ve spent the last two years putting in that brand new business into Travelzoo. And we’re really focused on productivity within that business, not just on our sales force, but also through our audience. What we’re seeing is that we are the most productive in the industry set within that local voucher type business. So we’re satisfied now, that we’ve achieved what we set out to do. And what we’re seeing on the audience size is very strong with fee rates, half of people, who’re purchasing a second deal, already bought or purchasing a deal, already purchased one before.

So that gives us confidence now to say okay, that’s good, the systems are in place, the processes are in place. We can add heads relatively easily; we are demonstrating that we can do that. So now it’s time to put our foot back on the gas on audience growth. And we’re very excited about the quality of our content. I mentioned Newburgh and Dallas, and a few others, but that we just now need more people to know about these phenomenal deals that we have.

Glen would you like to add anything to this?

Glen Ceremony

Yeah, the only thing I’d add is just, we’ve got a profitable business and the opportunity to put that capital to work, to grow our business across the board, I mean it’s exciting, just – and as Chris said, we’ve made investments in the product and building out a new business and adding people, and we think we want to do the audience in addition to that. I think, in the last, I would say 12 months to 18 months, those investments were – it was more of a trade off, we didn't invest as heavily in the audience, and to so now we’re stepping it up on that as well.

Edward Woo – Ascendiant Capital Markets

All right. And the other question I have is, have you seen any change in the model of competition, and local deals, I know you have to talk to daily deals case, either changes of being able to sign up your merchants or changes in commission rates?

Christopher Loughlin

Glen can answer that question.

Glen Ceremony

I don't think, anything dramatically have changed, it’s still highly competitive out there, and there is always pressure on the take rates, I would say ours are relatively consistent, but our view is, it’s kind of a one-by-one situation, it’s the really high-quality establishment. We’re not going to like chop or take rate and how, but we're also going to look at the wider opportunity. But compared to last quarter, no big change in competition, I think it is highly competitive out there, there’s a lot of options out there. But as we’ve said last quarter, our hope and what we think, we’re seeing in the market is that the smaller ones are going to – that on the lower end are going start dropping out, because they always do new funding, and not have the ability to sustain a business.

And that’s what we feel very confident, because we’re in a position where we are earning a profit in this business and we think we are placed to take advantage of the opportunity.

Edward Woo – Ascendiant Capital Markets

Okay. Thank you and good luck.

Christopher Loughlin

Thank you, Ed.

Glen Ceremony

Thanks, Ed.


Our next question comes from Daniel Kurnos of Benchmark.

Daniel Kunros – The Benchmark Company

Just to start with Chris, at first glance, just looking at the numbers before getting into the presentation, it looked like you didn’t pursue your re-acceleration strategy and if anything ran your expenses a bit leaner than expected, but then you noted that you hired sales staff to begin after June. I’m just curious if you could give us a sense of why you didn’t opt to pursue this more aggressive strategy in this quarter, and if there was anything you have with the industry dynamics or other factors that influence your decision on the timing of spend?

Christopher Loughlin

Well, I think if you recall, we announced that about – we announced our intention about three weeks after the end of the last quarter and that gives us ten weeks to achieve the goal. It’s not realistic to hire all of the people within ten weeks. People generally need – if you find the people that takes you – it could take you four to six weeks to find the right candidates and get them through the interview process then they need to resign and its somewhat also could be skewed. In the U.S., you can give a two week resignation or you could probably walk out the door immediately, but in Europe, some people need to give three months resignation in order to start. So it’s not that we didn’t pursue aggressively, we certainly did, but it’s just – I think it’s a normal time horizon that we applied there.

Daniel Kunros – The Benchmark Company

Okay. So, but then you mentioned here about the subscriber re-acceleration, which I think you actually had touched on in Q1. I’m kind of curious how you feel about pricing on the third side as it relates to marketing in that area. I mean you clearly committed here to a more aggressive re-acceleration strategy, but are you concerned that the initial return might be somewhat limited by the higher current pricing environment? And do you think you might keep spend more towards the bottom of your quarterly range at the beginning and possibly increase it towards the higher end over time?

Christopher Loughlin

There are lots of questions in that. So, okay, I really don’t know. I mean we haven’t – you don’t know pricing at this level until we start to spend and put our piece out. So, with respect to subscribers spending and the way in which we go about acquiring subscribers obviously changes, now that media has changed, I mean it’s more social, it’s more mobile. It’s a little bit of a different world. With respect to search, I think that’s a separate group within our organization and we don’t typically search to acquire subscribers. So they’re some more unrelated.

Daniel Kunros – The Benchmark Company

Do you have a preference international versus domestic for where you think, you’ll target your subscriber ads going forward?

Christopher Loughlin

Well, we said in the presentation that we’re looking at the U.S., Canada, UK, Germany and wherever we can find the most attractive advertising opportunities and we would pursue those. For us those markets are of equal importance. And then within the United States, obviously, it’s where we have the Local Deals platform running in the major MSAs.

Daniel Kunros – The Benchmark Company

Okay. Great, thanks. Speaking about the expense team for a second, you did mention that your cost of revenues was down significantly in the quarter versus your run rate of closer to $4 million and down sequentially as a percentage of revenue. You talked about the lower subscriber refunds is the driver there. I’m just curious if you could give us some color on how we should think about cost of revenues going forward?

Christopher Loughlin

Glen, would you answer the question please?

Glen Ceremony

Yeah, I would say, they’re always going to be impacted by the subscriber refunds, right. I think we had some spikes in the prior quarter, in Q1 from a couple of deals, but as time passes, I would say at this level or the kind of in the 90%, low 90s levels is what we would expect. We think we’ve done a good job of kind of assessing the risk upfront, the merchants kind of limits that – the refund that flows through the cost of revenue because we can delay. The payment terms are different for riskier merchants than they are for high quality.

Daniel Kunros – The Benchmark Company

Got it. And Chris, just again on the international versus domestic, as you ramp your head count, I’m curious where you see the greater market opportunity and if you have a particular focus in the near-term one versus the other?0

Christopher Loughlin

The four markets I mentioned is, where we have the focus at this time. These are all big markets and for us they’re equally important. Obviously the U.S. is still our largest market. It’s the largest territory. So I would think – we have more focus there, but the UK and Germany at the time will see a ramp too. And one of the thing on the subscriber growth, you said, why didn’t you guys accelerate faster last quarter. Please don’t miss the point that we added 500,000 downloads to our mobile app, and that doubled the penetration amongst mobile. That’s not in the first number you see on new subscribers added. So we’re not calling those people as subscribers, but they are engaged and we’re looking at the lifetime value of those people. For us that’s tremendously exciting and that’s really where we switched our attention in this last quarter.

Daniel Kunros – The Benchmark Company

Got it. Just a couple more from me, generically speaking we’ve seen fundamental resilience in the broader travel market and within travel search advertising, could you give us some insight into what you’re seeing from a macro perspective and how the landscape looks to be shaping up for the remainder of the year?

Glen Ceremony

Yeah. I mean, I would say from our perspective prices are relatively high at this time in search and that demand – that was an indication that demand is relatively – it’s not high, but it’s, I would say medium to high relative to our experience in the past.

Daniel Kunros – The Benchmark Company

And on the travel, broader travel market, any macro insights either domestically or internationally?

Glen Ceremony

Well, obviously, the airline consolidations add prices are high. It seems there might be some opportunity for us particularly across the Atlantic coming into the fall. And we definitely we saw more hotel deals in the major cities this year versus last year. So it seems that consumers may pull back a little bit more. And it’s always there seems it’s more incidents or two which is, can we get a reservation at the restaurant. It seems that it’s possible which tends to indicate that demand is a little softer at the moment, but I think it’s probably best to look at the analysis of the banks and then you can understand that better.

Daniel Kunros – The Benchmark Company

Sure. And then just lastly from me on a company specific note, how do you think you’ve faired and what have you done to recover some of the lost revenue that you noted in Q1, and you did call out that sort of continue to shift away from third-party marketing by the travel intermediaries, I’m just curious how long you think that will persist? Thanks a lot.

Christopher Loughlin

I think these businesses, the third parties, they’re going for efficiency, they’re rather going for profits than revenue growth and that’s what we’re seeing across group of private and public companies in that space. So it’s been rather static, some of them will pull back, some of them went out of business in Europe. So, that’s what we saw. I don’t think it particularly changes very much. The smaller to medium size guys could change with seasonality as we get into the winter particularly in Europe some of those businesses may fail because they may not have the cash to get through the winter, so that’s a concern, but I think we had the same concern last winter. And I would say no change; it would be my overall remark.

Daniel Kunros – The Benchmark Company

All right. Thanks a lot again.

Christopher Loughlin

Thank you.


I’m not showing any further questions at this time. I’d now like to turn the conference back to Mr. Loughlin.

Christopher Loughlin

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


Thank you, ladies and gentlemen. This does conclude today’s conference. You may now disconnect your lines at this time and have a nice day.

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