Travelzoo (TZOO) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to the Travelzoo second-quarter 2006 financial results conference call (OPERATOR INSTRUCTIONS). Today's call is being recorded.

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.

Good morning and thank you all for joining us today for Travelzoo's second-quarter 2006 financial results conference call. I am Ralph Bartel, Chairman and Chief Executive Officer. With me today is Lisa Su, the Company's Controller for North America, and Holger Bartel, Executive Vice President.

Good morning. Welcome to our conference call.

Good morning, everyone.

Before we begin, I would like to walk you through today's format. First, will discuss the Company's second-quarter 2006 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.

Today, Travelzoo announced its 32nd consecutive quarter of growth in online advertising sales. For eight years now, since inception, Travelzoo has reported quarter-over-quarter increases in revenues and has been continuously profitable.

Diluted earnings per share for Q2 2006 were $0.23, up from $0.12 in the prior-year period. Our revenue increased to $17.4 million for Q2 2006, an increase of 42% over revenue of $12.3 million in the same period last year. The quarterly sequential revenue increase from Q1 2006 to Q2 2006 was 3%.

All of our publications and products, which provide latest and reliable information on the very best travel offers from more than 500 travel companies, contributed to the growth. Our publications and products include the Travelzoo website and Travelzoo Top 20 newsletters in the U.S., Canada and the UK; Newsflash; and SuperSearch, a travel search engine.

Our North America business segment revenue in Q2 2006 was $16.7 million, an increase of $4.4 million compared to Q2 2005. Our Europe business segment revenue in Q2 2006 was $743,000, a $734,000 increase year over year.

In terms of revenue concentration, Travelzoo had one group of advertisers under common control that accounted for 19% of revenues, and another group of advertisers under common control that accounted for 15% of revenues in Q2 2006. No other group of advertisers accounted for more than 10% of revenues.

Travelzoo's operating income in Q2 2006 was $7 million, an increase of 86% compared to Q2 2005 operating income of $3.8 million. Operating margin in Q2 2006 was 43%, up from 36% in Q2 2005.

Travelzoo's net income in Q2 2006 was approximately $3.9 million, an increase of 77% compared to Q2 2005's net income of $2.2 million. Net income in Q2 2006 was impacted by a higher income tax rate.

Travelzoo's effective income tax rate in Q2 2006 was 47.3% compared to 43.6% in Q1 2006 and 45.1% in Q2 2005. The increase in our effective tax rate compared to Q1 2006 was due primarily to the increase in the loss from our Europe business segment and our new operations in Canada.

For financial reporting purposes, the losses from our Europe business segment and operations in Canada and the cash program expenses were treated as having no recognizable tax benefit.

Cash flow from operations in Q2 2006 was $3.3 million. Cash flow from operations was impacted by income tax payments of approximately $5.2 million during the quarter.

DSOs -- that's days sales outstanding -- as of June 30, 2006, was 48 days compared to 51 days as of March 31, 2006. Total cash, cash equivalents and short-term investments as of June 30, 2006, decreased from $25.1 million from $41.7 million as of March 31, 2006, due primarily to the Company's repurchase of common stock.

I will now turn to Lisa to discuss additional information for our two business segments, North America and Europe, including headcount, expenses and operating income.

We believe that Travelzoo continues to be a highly productive company. We had 75 employees as of June 30, 2006. 63 of these employees were in North America and 12 employees were in Europe. Average annualized revenue per employee in Q2 2006 was $926,000, up from $817,000 in the same period last year.

Let's now look at the expense line items of our two 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 were $7.1 million, up 16% from $6.2 million in Q2 2005 and up from $6.5 million in Q1 2006.

Sales and marketing expenses as a percentage of revenue decreased from 50% in Q2 2005 to 42.8% in Q2 2006. The increase from Q2 2005 was primarily due to increased spending on marketing for SuperSearch; salary expenses associated with sales and marketing staff; and spending on subscriber acquisition campaigns. The increase from Q1 2006 was primarily due to expenses related to specific promotional and brand marketing, including the promotion of our 10 millionth subscriber and an increase in salary expenses associated with sales and marketing staff.

In North America, general and administrative expenses were $1.8 million in Q2 2006 compared to $2 million in Q2 2005 and $2.3 million in Q1 2006. The $500,000 decrease in G&A versus last quarter was due primarily to a $366,000 decrease in legal and professional services expense, which included SOX compliance costs and a $269,000 decreased in bad debt expense, offset by increases in office expenses. The $200,000 decrease in G&A versus last year was due primarily to a $142,000 decrease in legal and professional services expense.

North America operating income for Q2 2006 was $7.5 million, up from $3.9 million for the same period last year. Operating margin for Q2 2006 was 44.9% compared to 32% for the same period last year.

In Europe, our largest expense item is also 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 Q2 2006 was $814,000 compared to $638,000 in Q1 2006. The increase over last quarter was due primarily to expenses related to subscriber acquisitions, which were necessary to achieve the critical number of 500,000 subscribers in the UK.

In Europe, total general and administrative expenses in Q2 2006 were $396,000 compared to $337,000 in Q1 2006. Our Europe business segment incurred an operating loss of $494,000 in Q2 2006 compared to an operating loss of $460,000 in Q1 2006. Excluding subscriber acquisition costs, the operating loss would have been $146,000 in Q2 2006. It is our goal to achieve profitability in the UK as soon as possible.

This concludes our discussion of Travelzoo's Q2 2006 financial results. We will turn back now to Ralph, who will provide more information on the growth of our reach and our growth strategy.

Thank you, Lisa. Travelzoo entered a total of 895,000 new subscribers to its e-mail publications during Q2 2006. In North America, we acquired 738,000 new subscribers at an average cost of $2.11 per subscriber in Q2 2006 compared to $2.54 in Q1 2006.

In North America, Travelzoo's Top 20 newsletter and Newsflash e-mail alert service had a net unduplicated total of 10 million subscribers as of June 30, 2006. This represents an increase of 16% versus the same time last year, while revenue increased 42%. Management believes that this shows that Travelzoo is able to successfully generate higher revenue as our reach continues to increase.

In Europe, we acquired 129,000 subscribers at an average cost of $2.69 per subscriber in Q2 2006 compared to $2.12 in Q1 2006. Europe had a net unduplicated total of 520,000 subscribers as of June 30, 2006.

In 2005, Travelzoo began its growth strategy of expanding into selected foreign markets. So far, we're very pleased with this strategy. We see a competitive advantage from being able to cross-sell advertising internationally. For example, our salesforce in the U.S. now sells inclusions for our UK publications, but our salesforces in the UK and Germany also sell inclusions for our U.S. publications.

Another competitive advantage is our improved ability to source the very best travel deals and perform a very high-quality review by leveraging the specific knowledge of our producers in our offices in four countries and eight cities -- New York; Mountain View, California; Las Vegas; Chicago; Miami; Toronto; London; and Munich.

This concludes the discussion of 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.

(OPERATOR INSTRUCTIONS). George Mihalos, Gilford Securities.

I was hoping you could provide some more clarity in terms of revenues during the quarter. Specifically, could you talk a little bit about the newsletter business versus SuperSearch? And if you can't get all that specific, can you maybe talk about search query growth in SuperSearch on a sequential basis?

Yes, we will talk. As you know, we do not break out revenues by product. But certainly, we will provide more information. Holger Bartel, our Executive Vice President, will take your question.

Yes, we were actually not that unhappy with revenues in the quarter. Our goal is, long term, to achieve continuous long-term revenue growth. And there's a certain range within which we want to stay. In Q1, we had a very good quarter. We were on the upper end of this range this quarter. In Q2, we were a little bit on the lower end of this range, and we were actually happy with the growth among all products.

The product that didn't do so well in Q2 specifically, just to address your question, was the Newsflash alert service, where revenues were a little bit lower than where we wanted to see it. However, what we have noticed is that in the first three weeks of July now, we are seeing a very heavy activity in Newsflash.

So I sense that this has been primarily a seasonal issue this quarter because airlines and some other travel providers were very busy this summer, so some of them delayed their sales. So maybe we were affected by that, that some of these Newsflash e-mails are now being sent out in Q3 rather than in Q2.

In terms of SuperSearch usage, usage overall there has increased 49% versus last year. So we still see very robust growth there.

Can you update us on the share buyback plan? Is that complete as of now?

Yes, George, that has been completed.

(OPERATOR INSTRUCTIONS). Bill Lennon, Wedbush Morgan.

I have three questions. First is -- I'll do the easy one. Can you help us figure out how to think about a tax rate for the rest of the year?

Second question is the acquisition cost of subscribers in the U.S. varied very favorably, at least with our estimate. I wonder if you could tell us how you got that -- I think you said $2.11; that's a great number -- could you tell us what's going on there? I don't think advertising rates are coming down. Are you just getting smarter about buying?

And the third question I'll probably ask every quarter from now until the end of time is, with gasoline and consumer financing costs going in the wrong direction, are you hearing any of your customers getting concerned about consumer expenditure over the next six to 12 months?

Lisa will answer your question regarding the tax rate, and Holger will answer your question regarding the subscriber acquisition in the U.S. and will also try to answer your question regarding the gas. Lisa, please?

Our tax rate is really determined by how much loss we have in our foreign operations. At this time, we really can't predict what our tax rate is going to be because our losses from foreign operations could fluctuate, depending on how fast we grow into those markets. Right now, they are all being treated as having no -- there is the taxable benefit for those losses. I would hope that our tax rate doesn't increase significantly from what it is now, but at this time, I can really give an accurate forecast.

On the subscriber acquisition costs, we were indeed very happy; $2.11 is a great number. Last year in Q2, we were at $2.59. So we actually saw quite a decrease there. It really has three reasons. The first reason -- yes, we want to become smarter in our media buys, and we did some good media buys in Q2 that we hope that we will be able to continue.

Second, you should note that the subscriber acquisition cost is for North America, which means that it includes Canada as well. We started to [print] the newsletter in Canada two months ago. What we typically see is when we enter a new market, at the beginning we're able to sign up subscribers at a relatively low cost per acquisition, so we benefited from that. We saw the same in the UK, as you probably will recall.

Third, overall, it's of course our strategy to also leverage our existing subscriber base. We now have 10 million subscribers in North America alone who love our product, and we are developing more and more programs to get them to refer other users to the newsletter. This is, of course, the best acquisition strategy for us because acquisition cost of these subscribers is fewer, and we want to leverage that even more in the future.

Finally, with regards to your question on gasoline consumer trends, I really can't give you a different answer than last quarter. I haven't seen it impact our business. I haven't heard from the travel companies that it impacted their business. The airline business has been very, very strong this summer. So I don't see anything that has changed over the last three months.

Just a follow-up, maybe for Lisa, on the tax question. The situation where you say you can't use any of those -- you get no benefit from any of those losses, does that ever change? Is there any sort of trigger, or are those foreign losses of no tax value?

Well, the trigger will be when we actually make a profit in any of those locations. So at that point, we might actually get a huge tax benefit. But in the future, who knows when it will be, but once we start accumulating a profit, we will be able to recognize a tax effect for all of our previous losses.

(OPERATOR INSTRUCTIONS). There appear to be no further questions at this time. I'll turn the call back over to Mr. Bartel.

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

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