Travelzoo (TZOO) 2007 Q2 法說會逐字稿

Good afternoon, everyone. And welcome to the Travelzoo 2nd Quarter 2007 Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation. Today's call is being recorded.

It is now my pleasure to turn the floor over to your host Ralph Bartell, Travelzoo's Chairman and Chief Executive Officer. Sir, you may begin.

Thank you, Operator. Good afternoon, and thank you all for joining us today for Travelzoo's 2nd Quarter 2007 Financial Results Conference Call. I'm Ralph Bartel, Chairman and Chief Executive Officer.

With me today is Wayne Lee -- the Company's Chief Financial Officer -- and Holger Bartel, Executive Vice President.

Hello, everyone. Welcome to our conference call.

Good afternoon, everyone.

Before we begin, I would like to walk you through today's format. First, we will discuss the Company's 2nd 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 historic effect 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 10K and 10Q, 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 19 minutes after the conclusion of this call.

Today, Travelzoo announced its 36th consecutive quarter of revenue growth. Diluted earnings-per-share for Q2 2007 were $0.17 -- down from $0.23 in the prior-year period.

Our revenue increased to $20.1 million in Q2 2007 -- an increase of 16% over revenue of $17.4 million in the same period last year. The quarterly sequential revenue increase from Q1 2007 to Q2 2007 was 2%.

All of our publications and products, which provide latest and reliable information on the very best travel offers for more than 600 travel companies contributed to the year-over-year growth. Our publications and products include the Travelzoo websites and Travelzoo Top 20 newsletters in the US, Canada, UK and Germany. NewsFlash, SuperSearch -- our travel search engine -- and the Travelzoo network, an affiliate network of partners that list travel deals published by Travelzoo.

Our North America business segment revenue in Q2 2007 was $18.7 million -- an increase of 12%. Our Europe business segment revenue in Q2 2007 was $1.5 million -- an increase of 102%, year-over-year. Our new Asia-Pacific business segment did not generate any revenue in Q2 2007.

In terms of revenue concentration, Travelzoo had one group of advertisers under common control that accounted for 16% of revenue. And another group of advertisers under common control that accounted for 10% of revenue in Q2, 2007. No other group of advertisers accounted for 10% or more of revenue.

I will turn now to Wayne, to discuss additional information for the group and our 3 business segments -- North America, Europe and Asia-Pacific -- including headcount, expenses and operating income.

Thank you, Ralph.

Travelzoo's operating income in Q2 2007, was $5.8 million -- a decrease of 18%, compared to Q2 2006 operating income of $7 million. Operating margin in Q2 2007 was 28.6% -- down from 40.3% in Q2 2006.

Travelzoo's net income in Q2 2007 was $2.8 million -- down from Q2 2006 net income of $3.9 million. Reported net income was negatively impacted by an increase in our effective income tax rate.

Travelzoo's effective income tax rate in Q2 2007 was 54.2% -- compared to 48.2% in Q1 2007, and 47.3% in Q2 2006. The increase in our effective tax rate, compared to Q1 2007 and Q2 2006, was due primarily to the increase in the losses from our Europe and Asia-Pacific business segments.

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

Cash flow from operations in Q2 2007 was $2.2 million. DSO -- that's Days Sales Outstanding -- as of June 30th 2007 -- was 42 days, compared to 45 days, as of March 31st 2007.

Total cash and cash equivalents as of June 30th 2007 increased to $41.9 million, from $39.9 million as of March 31st 2007 -- due primarily to the cash generated from operations.

We believe that Travelzoo continues to be a highly productive company. We had 113 employees as of June 30th, 2007 -- up from 75 employees as of June 30th 2006, and up from 94 employees as of March 31st 2007. 82 of these employees were in North America, 25 employees were in Europe, and 6 were in Asia.

Average annualized revenue per employee in Q2 2007 was $712,000 -- down from $926,000 in the same period last year.

Let's now look at the expense line items of our 3 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 were $8.7 million -- up from $7.1 million in Q2 2006, and $7.9 million in Q1 2007.

Sales and marketing expenses as a percentage of revenue increased to 46.7% in Q2 2007, from 42.8% in Q2 2006. The increase from Q2 2006 was primarily due to increased salary expenses associated with sales and marketing staff, and increased spending on marketing for SuperSearch.

The increase from Q1 2007 was primarily due to increased spending on marketing for SuperSearch, and increased spending on brand marketing campaigns -- offset by decreased spending on subscriber acquisition campaigns.

In North America, G&A expenses were $2.3 million in Q2 2007 -- up from $1.8 million in Q2 2006, and up from $2.1 million in Q1 2007. The increase in G&A expenses versus last year was due primarily to increases in legal and professional service expenses, and expenses for corporate functions.

North America operating income for Q2 2007 was $7.3 million -- down from $7.5 million for the same period last year. Operating margin for Q2 2007 was 39.1%, compared to 44.9% for the same period last year. In Europe, our largest expense item also 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 Q2 2007 were $2 million -- up from $814,000 in Q2 2006, and up from $1.5 million in Q1 2007. The $1.2 million increase from Q2 2006 was due primarily to a $565,000 increase in spending on subscriber-acquisition campaigns -- as well as increased spending on search advertising and increased salary expenses associated with sales and marketing staff.

The $528,000 increase from Q1 2007 was due primarily to a $293,000 increase in spending on subscriber-acquisition campaigns, and increased spending on search advertising.

In Europe, total G&A expenses in Q2 2007 were $602,000 -- up from $396,000 in Q2 2006, and up from $469,000 in Q1 2007. The increases in G&A expenses versus last year and last quarter were due primarily to increases in office expenses and salary expenses.

Our Europe business segment incurred an operating loss of $1.2 million in Q2 2007 -- compared to an operating loss of $494,000 in Q2 2006. Though revenues increased by $755,000, the operating loss increased as both the sales and marketing and G&A expenses increased.

Our Asia-Pacific business segment -- which consists of our operations in Hong Kong -- incurred operating expenses and an operating loss of $400,000 in Q2 2007. The $400,000 was primarily G&A expenses related to salary expense and office expense.

Travelzoo began operations in Hong Kong in April 2007.

This concludes our discussion of Travelzoo's Q2 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.

Thank you, Wayne.

During Q2 2007, Travelzoo added a total of 758,000 new subscribers to its e-mail publications. In North America, we acquired 552,000 subscribers, at an average cost of $3.03 per subscriber in Q2 2007, compared to 730,000 subscribers at an average cost of $2.61 in Q1 2007.

In North America, Travelzoo's Top 20 newsletter and NewsFlash e-mail alert service had a net unduplicated total of 10.8 million subscribers as of June 30th 2007. This represents and increase of 9% versus the same time last year, while revenue increased 12% year-over-year. Management believes that this shows that Travelzoo is able to successfully generate higher revenue as our reach continues to increase.

In Europe, we acquired 206,000 subscribers, at an average cost of $4.43 per subscriber in Q2 2007, compared to 159,000 subscribers at an average cost of $3.89 in Q1 2007.

In Europe, Travelzoo's Top 20 newsletter and NewsFlash e-mail alert service had a net unduplicated total of 950,000 subscribers as of June 30th 2007. An increase of 83% versus the same time last year.

In 2005, Travelzoo began its growth strategy of expanding into selected international markets. So far, we are pleased with this strategy. We see a competitive advantage from being able to cross-sell advertising globally. For example, our sales force in the US and our sales inclusions for our UK and Canadian publications -- while our sales force in Europe also sells inclusions for our US 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 specific knowledge of our producers in offices in 6 countries and 12 cities.

In Q2, we further developed a new section of our US website, that lists deals for shows and events. We further developed the Travelzoo network -- an affiliate network that increases the reach of our content beyond Travelzoo's own media properties.

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'll turn the call back to the operator now for the question-and-answer session.

Thank you.

The floor is now open for questions. If you do have a question, please press the * followed by 1 on your touchtone phone, at this time.

Once again, if you do have a question, ladies and gentlemen, that is * followed by 1, on your touchtone phone. If using a speakerphone, please make sure the mute function is turned off so the signal will reach our equipment. Please hold while we poll for questions. Thank you.

Once again, if you would like to ask a question, press *, then 1 on your touchtone telephone.

Our first question comes from Bill Lennan with First Albany. Please go ahead.

Hello, Bill.

Hi. How are you, Ralph?

Good. How are you, Bill?

Thank you. Good. And Hi, Holger.

Hi, Bill.

And Wayne, as well.

Looking at the significant customer percentages you gave, if my math is correct, assuming the 2 significant customers are the same as a year ago, the spending on the 2 significant customers was down call it 6 or 700,000 year-over-year. That's Part 1.

And then Part 2 -- if you back those customers out -- you also back out other significant customers you had last year. It looks like the revenue from non-significant, non-10% customers, was up maybe 5 or 6%. I don't know if those numbers are actually precise.

But my question is, is expenditure down in total from your 2 significant customers? If so, why? And then also for the everybody else. The non-10% customers. Growth seems to have slightly decelerated. Is that in fact true? And if so, what's going on there?

Wayne will take this question.

Hi. Yes. Hi, Bill.

So with our 10% and our 16% customers, so far, it hasn't changed. So you are correct in that regard.

With regards to their specific spending in Hawaii -- it would have decreased. I can't comment on that. I'm not really sure as to what their plans were.

It's all policy, Bill, not to comment on individual clients. Or maybe I should make a comment from the product side. Because first of all, of course, it's our interest to diversify revenues as much as we can. Particularly on the SuperSearch product -- as this has grown over the last 3 years.

We are adding continuously new advertisers. The model there is a little bit like Google. The more advertisers you have, the fewer clicks you deliver to a certain customer. So the extra spend of a customer is not necessarily related to their desire of how many clicks they want to purchase.

It rather could also indicate that we just have a larger number of advertisers in that product, and the more advertisers we have participating in the SuperSearch product, the better it is for us.

Okay. And then on the customer-acquisition side. The cost per sub acquired, both in the US and Europe. I know it jumps around, but I think this is the first time we've seen it with a 4 in North America. Can you tell us what's going on there? Is it getting more difficult to acquire customers? And do you have any comments on the outlook for those customer acquisition costs for the next 2 quarters or so?

Bill, this is Ralph. As you said, the subscriber acquisition costs historically fluctuated a lot at Travelzoo. Of course long-term, you saw a trend with it going up -- because the more subscribers Travelzoo has, the more difficult it is to sign up additional subscribers.

In Europe, the number was impacted by higher subscriber-acquisition costs in Germany, and there it is too early to say for us if this is a known trend or not. So we cannot say how this will develop in the future quarters.

Okay. And there's one number I think you normally wait to give in to the filing. I wonder if you have it handy and you can share it with us on the call, if possible. That's advertising. The percentage that advertising represented of total sales and marketing. I think it was 67% last quarter.

Bill, this is Wayne. Yes. We'll provide that number when we file our 10Q.

Okay. Final question, and then where I'm really going with this is, I'm trying to break out what you spent on advertising versus the fixed cost of headcount. Was there any material move on the marketing side? The percentage of costs that are fixed? You've got some new hires. You've got new offices. Is it safe to say that fixed costs on the marketing side stepped up materially from Q1 to Q2?

The increase from Q1 '07 to Q2 '07 was not material on the headcount side.

Okay. Thanks.

Thank you, Bill.

As a reminder, if you would like to ask a question, press the *, followed by 1 on your touchtone phone. We will take our next question from Michael Millman with Soleil Securities. Please go ahead.

Hello, Michael. How are you?

Hello. Thank you for taking my call. Along the same lines as the first question, about industry dynamics. The travel companies -- Expedia and Orbitz -- have substantially accelerated their pursuit of advertising, and in fact, Expedia's actually made a number of small acquisitions. Can you talk about how you see that competition affecting the market and your business, specifically?

Michael, once again, we don't comment. It's our policy not to comment on individual clients.

Well, I'm asking more about not them as clients, but them as competitors.

We don't view them as competitors. They are clients that provide a unique and very attractive content, and that is relevant to our millions of subscribers.

So you don't see any reduction from the fact that they're also trying to attract advertisers to their sites?

No. Our objective is to provide these millions of subscribers and users the highest-quality information. And on one hand, that's variety. The more travel companies we have that provide deals on our websites and our newsletters, the better. And the more we review these deals and make sure that the very best deals get published and they are accurate and they are easy to book, the better we do our job -- and the better the quality is that is provided to the subscribers and users.

Okay. Thank you very much.

Thank you, Michael.

Maybe -- Michael, this is Holger -- I can add one interesting data point, here. From the outside, a lot of the e-mails that are sent out by various companies about travel deals look very similar. But as Ralph pointed out, where we really differentiate ourselves is the high-quality standards we have. We have a test booking center. We have the largest number of producers. We source deals globally. This is what makes our content very interesting for the affiliates we are now signing up for our network.

But an interesting number -- just to see how loyal our audience is -- if you look, for example, at the month of June 2007. Compare it to the previous year. The number of subscribers in North American increased by 12%, year-over-year. Yet, the number of clicks that we are generating from sending the Top 20 e-mail to these subscribers increased on average by 21%. So it increased even more than the number of subscribers.

If you keep in mind that this is an audience that -- to some extent -- is also maturing, it just indicates how active our subscriber base is. How loyal they are. They like the product we send them, because the quality of the deals we send them is higher than the quality that they receive from other newsletters. So in the short-term, yes -- you might see other companies launching similar products. But we have to see and wait whether these are successful, the long run. The business is not so easy as it might look like from an outside perspective.

Just following up on that -- and that was very useful -- what kind of a typical click do you get from new subscribers versus from existing?

That's a specific number we don't want to release for competitive reasons. But as you see from the numbers I indicated, subscribers that we have signed up years ago are still very active in responding to the newsletter.

Are new subscribers more or less active than existing?

Again, to what extent they click more or less is something that we don't want to disclose.

Okay. Thank you.

Sure.

Once again -- if you do have a question, ladies and gentlemen, that is * followed by 1, on your touchtone phone. We will pause for just a moment.

And we do have a follow-up question from Bill Lennan with First Albany. Please go ahead. Mr. Lennan, your line is open. Please come forward with your question.

Sorry. I was on mute. This is probably for Wayne. Wayne, could you remind us again on the losses in Europe and Asia -- are those treated separately? In other words, if Europe goes profitability before Asia, you'll be able to use those against your US taxes? Or is all international treated as one lump sum for tax purposes?

Bill, they're treated separately, but if they would turn profitable -- for example, in Europe -- they would go to us. But the last carry forward would go to us. Any profits that they would make in the future. Not against the US.

Okay. Thanks.

There are no further questions. I'll turn back now 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.