Travelzoo (TZOO) 2008 Q1 法說會逐字稿

Welcome to the Travelzoo first quarter 2008 financial results 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 conference 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. You may begin.

Thank you, operator. Good afternoon, and thank you, all, for joining us today for Travelzoo's 2008 first quarter financial results call. I'm Ralph Bartel, Chairman and Chief Executive Officer. With me today is Wayne Lee, the Company's Chief Financial Officer, C.J. Kettler, President, North America and Chris Loughlin, Executive Vice President, Europe.

Hello, everyone welcome to our conference call.

Good afternoon everyone.

Welcome everyone.

Before we begin, Wayne will walk us through today's format.

First, we will discuss the Company's first 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 Q1 2008 results.

Today Travelzoo announced its results for the first quarter of 2008. Diluted loss per share was $0.07, down from diluted earnings per share of $0.25 cents 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 164%. Our revenue increased to $20.9 million in Q1 2008, an increase of 6% over revenue of $19.7 million in the same period last year. Quarterly sequential revenue increased 10% from Q4 2007 to Q1 2008. e publications and products that contributed to our revenue are the Travelzoo web sites in Australia, Canada, France, Germany, Hong Kong, Japan, the U.K. and U.S., he Travelzoo network in the U.S., the top 20 newsletters in Canada, France, Germany, Hong Kong, Japan, the U.K. and the U.S., the news flash alert services in Canada, the U.K., and the U.S. and Super Search in the U.K. and the U.S. The Travelzoo website in Taiwan and China did not generate any revenue in Q1 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 2.7 million ratings from Travelzoo users and makes it very easy for users to find the web sites from suppliers that offer the best prices and connections for specific dates. The Travelzoo network is a network of third party web sites 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 sections North America, Asia Pacific and Europe, including head count, expenses and operating income

Thank you, Ralph. Our North America business segment revenue in Q1 2008 was $18.9 million, an increase of 2% year over year. Our Europe business segment revenue in Q1 2008 was $2 million, an increase of 59% year over year. Our new Asia Pacific business segment generated $20,000 of revenue in Q1 2008. In terms of revenue concentration, Travelzoo had one group of advertisers under common control that accounted for 12% of revenue in Q1 2008. No other group of advertisers accounted for 10% or more of revenue. Travelzoo's operating income in Q1 2008 was $1.3 million, a decrease of 83% compared to Q1 2007 operating income of $7.5 million. Operating margin in Q1 2008 was 6.1%, down from 37.9% in Q1 2007. Travelzoo's net loss in Q1 2008 was $1 million, down from Q1 2007 income of $4.1 million.

Reported net income was negatively impacted by an increase in our effective income tax rate. Travelzoo's effective income tax rate in Q1 2008, was 164.2% compared to 98.3% in Q4 2007 and 48.2% in Q1 2007. The increase in our effective tax rate compared to Q4 2007 and Q1 2007 was due primarily in the increase in the losses from Asia Pacific and Europe business segments. For financial reporting purposes, the $4.8 million in losses from our Asia Pacific and Europe business segments were treated as having no recognizable tax benefit. Cash provided by operations in Q1 2008 was $3.6 million. DSOs, that's days sales outstanding, as of March 31st, 2008 was 49 days unchanged from December 31st, 2007. Total cash and cash equivalents as of March 31st, 2008 increased to $24.4 million from $22.6 million as of December 31st, 2007.

In terms of head count, Travelzoo had 178 employees as of March 31st, 2008 up from 94 employees as of March 31st, 2007 and up from 157 employees as of December 31st, 2007. As of March 31st, 2008, 101 of our employees were in North America, 38 employees were in Asia Pacific and 39 employees were in Europe. Average annualized revenue per employee in Q1 2008 was $471,000, down from $840,000 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 Q1 2008 was $8.6 million, up from $7.9 million in Q1 2007 and up from $7.6 million in Q4 2007. Sales and marketing expense as a percentage of revenue increased to 45.6% in Q1 2008 from 42.5% in Q1 2007.

The increase from Q1 2007 was primarily due to increased spending on marketing for Super Search, increased spending on brand, trade and other marketing campaigns and increased salary expenses offset by decreased spending on subscriber acquisition campaigns. The increase from Q4 2007 was primarily due to increased spending on marketing for Super Search and increased spending on subscriber acquisition campaigns. In North America, general and administrative expense was $3.3 million in Q1 2008, up from $2.2 million in Q1 2007 and up from $3.2 million in Q4 2007. The increase from Q1 2007 was primarily due to a $482,000 increase in salary expense and a $312,000 increase in rent and office expense. North America operating income for Q1 2008 was $6.3 million, down from $8.2 million in the same period last year. Operating margin for Q1 2008 was 33.1%, compared to 44.1% for the same period last year. For our Asia Pacific business segment, which consists of our our operations in Australia, China, Hong Kong, Japan and Taiwan, total sales and marketing expense in Q1 2008 was $1.6 million, up from $688,000 in Q4 2007.

Total general and administrative expense in Q1 2008 was $1.1 million, compared to $1.3 million in Q4 2007. The increase in sales and marketing expense was due primarily to a $705,000 increase in spending on subscriber acquisition campaigns and a $216,000 increase in salary expense. Travelzoo began operations in Hong Kong in April 2007, in Japan and in September of 2007, in China in October of 2007 and in Australia and Taiwan in December of 2007. Our Asia Pacific business segment incurred an operating loss of $2.7 million in Q1 2008, compared to an operating loss of $2.1 million in Q4 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 Q1 2008 was $3.1 million, up from $1.5 million in Q1 2007 and up from $2.1 million in Q4 2007.

The increase from Q1 2007 was primarily due to a $793,000 increase in spending on subscriber acquisition campaigns, a $398,000 increase in salary expense and a $338,000 increase in spending on search advertising. The increase from Q4 2007 was primarily due to a $444,000 increase in spending on subscriber acquisition campaigns, a $301,000 increase on spending in search advertising and a $152,000 increase in salary expense. In Europe, total general and administrative expense in Q1 2008 was $1.1 million, up from $469,000 in Q1 2007 and down slightly from $1.2 million in Q4 2007. The increase from Q1 2007 was primarily due to increases in salary expense, rent and office expenses and professional services expense. Travelzoo began operations in France in March 2007. Our Europe business segment incurred an operating loss of $2.2 million in Q1 2008 compared to an operating loss of $683,000 in Q1 2007. Though revenues increased by $761,000, the operating loss increased as both sales and marketing and general and administrative expenses increased. This concludes our discussion of Travelzoo's Q1, 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.

Thank you, Wayne. During Q1, 2008 Travelzoo added a total of 1.1 million new subscribers to its email publications. In North America, we acquired 297,000 subscribers at an average cost of $4.97 per subscriber in Q1 2008, compared to 280,000 subscribers at an average cost of $3.78 in Q4 2007. In North America, Travelzoo's top 20 newsletter and news flash email alert service had a net unduplicated total of 11 million subscribers as of March 31st, 2008. This represents an increase of 4% versus the same time last year, while revenues increased 2% year over year. In Asia Pacific, we acquired 393,000 subscribers at an average cost of $3.12 in Q1 2008 compared to 180,000 subscribers at an average cost of $2.90 per subscriber in Q4 2007. Travelzoo's top 20 newsletter and news flash email alert service had a net unduplicated total of 582,000 subscribers as of March 31st, 2008.

In Europe, we acquired 362,000 subscribers at an average cost of $3.90 per subscriber in Q1 2008, compared to 166,000 subscribers at an average cost of $5.85 in Q4 2007. In Europe Travelzoo's top 20 newsletter and news flash email alert service had a net unduplicated total of 1.7 million subscribers as of March 31st, 2008, an increase of 117% versus the same time last year. The cost of our 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 France in 2007, we are executing this strategy according to our plan. 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. We see a competitive advantage from being able to cross our 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 build a unique global network of producers and sales desks in 11 countries, Australia, Canada, China, Germany, Hong Kong, France, Japan, Spain, Taiwan, U.K. and 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 expand the Travelzoo network, a network of third party web sites that list travel deals published by Travelzoo.

Further, we plan to expand our shows and events section. Finally, we plan to launch the next generation of Super Search. 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. The floor is now open for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) We will pause for just a moment. Our first question will come from Marianne Wolk with Susquehanna.

Hi, this is Malindi for Marianne. A couple of questions. First, your CapEx increase was substantially higher than we expected. Just wondering to what we could attribute this. Also is there anything you can share about the functionality of the next generation Super Search? And then lastly I know you have a lot of local experts on the ground in different markets, is there anything you can tell us in terms of trends that they are seeing out there, any major differences in terms of U.S. versus Europe or Asia? Thanks.

C.J. will take your questions regarding Super Search and then Wayne will comment on the capital expenditures.

Hi. Thanks so much. In terms of Super Search we are looking to expand it. Obviously for competitive reasons we couldn't possibly get into much detail on that. But we do look to our user base to inform our process and really look to understand what the usability function is currently and how the user is utilizing these kind of search functions out in the marketplace to inform our developments on that product in the future.

Hi. This is Wayne. With regards to our capital expenditure spending in Q1, the increase is primarily due to new offices that we -- we moved headquarters in our New York office and also moved offices in Chicago, and as a result we had significant expenditures on both leasehold improvements and office furniture and equipment.

Thanks.

Thank you. Our next question will come from Ed Woo with Wedbush.

Yes, I had a question. Obviously everybody is talking about the weakening macro environment in the U.S. and you have seen some airlines consolidate, do you have any views on how that will impact your business.

Hello, Ed. Welcome to your call. C.J. will take your question.

Hi, Ed. Thanks so much for the question. The recent airline merger of Northwest and Delta we think is actually a very positive thing. Mergers are good for the travel sector because overall they are going to help the airlines cope with the high cost of oil versus obviously filing for bankruptcy. So our view is without these mergers airlines are likely to sell off their subsidiaries and redeploy regional airlines or sell off regional airlines and potentially even pare down routes and shrink capacity. So, our view is mergers is good for the travel sector in general.

Great. And the other question I have is have you seen any changes in trends on subscriber acquisition cost, particularly trying to get ad placement and whatnot?

I think again subscriber acquisition will always fluctuate by quarter. As you see in our numbers in Q1, we tested some new channels for acquisition that were more costly but of higher quality. We also moved to double confirmation in Q3. So whether or not it is a true macro trend or in response to our own movement towards double confirmation, I don't think we can truly answer that. That said, we are quite proud of the fact that we have over 13 million total unduplicated subscribers worldwide and over 11 million in North America.

Ed, we can also ask Chris Loughlin who manages our European business and ask him what trends he sees for subscriber trend in Europe.

Hi, Ed. If you look at the numbers from Europe, CPA is at just about exactly the same as Q1 of last year. We are not seeing -- we are not seeing any significant changes in terms of what we expected this quarter. Typically, if you go back now three years you can see that Q1 is stronger than Q4. The one thing to point out in that CPA, though, is maybe we did improve a little bit because the exchange rate actually worked against our favor. So, maybe we pulled our CPA down slightly further this quarter versus last year.

Thanks a lot.

Thank you, Ed.

Thank you, it does appear we have no further questions at this time. Mr. Bartel, I would like to turn the call back over to you for any further comments or closing remarks.

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

Thank. Ladies and gentlemen, that does conclude Travelzoo Incorporated conference call. We would like to thank everyone for their participation in today's call. Have a great rest of your day.