Travelzoo (TZOO) 2008 Q3 法說會逐字稿

Good afternoon, everyone, and welcome to the TravelZoo third quarter 2008 financial results conference call. At this time, all participants have been placed in 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, Holger Bartel, TravelZoo's Chief Executive Officer. Sir, you may begin.

Thank you Operator. Good afternoon and thank you all for joining us today for TravelZoo's third quarter 2008 financial results conference call. I'm Holger Bartel, Chief Executive Officer, and with me today are Wayne Lee, the company's Chief Financial Officer; Shirley Tafoya, President, North America; Chris Loughlin, Executive Vice President, Europe; and Jason Yap, Executive Vice President, Japan, Australia and Singapore.

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

First we will discuss the Company's third 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 the 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 Form's 10-K and 10-Q, and other periodic filings with the SEC.

An archive 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 Holger for an overview of the Company's Q3 2008 results.

Thank you, Wayne.

Today, TravelZoo announced its results for the third quarter of 2008. Diluted loss per share for Q3 2008 was $0.13, down from diluted earnings per share of $0.14 cents in the prior-year period. Our financial results were impacted by nontax deductible losses from our foreign operations in Asia Pacific and Europe, resulting in income tax expenses of $1.4 million on a $374,000 pretax loss.

Our revenue decreased to $18.8 million in Q3 2008, a decrease of 6% over revenue of $19.9 million in the same period last year. Quarterly sequential revenue decreased 14% from Q2 2008, to Q3 2008. The publications and products that contributed to the revenue are the TravelZoo website in Australia, Canada, China, France, Germany, Hong Kong, Japan, Spain, Taiwan, the UK, and the US. The TravelZoo network in the US, the top 20 newsletters in Australia, Canada, China, France, Germany, Hong Kong, Japan, Spain, the UK and the US; and the newsletter alert services in Canada, Germany, the UK and the US; and SuperSearch in Canada, UK, and the US.

Our publications and products provide latest and reliable information on the very best travel offers from hundreds of travel companies. SuperSearch 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 list travel deals published by TravelZoo.

I will now turn to Wayne to discuss additional information for the group, and for our three business segments, North America, Asia Pacific, and Europe. This will include head count, expenses and operating results.

Thank you, Holger.

Our North America business segment revenue in Q3 2008 was $16 million, a decrease of 13% year-over-year. Our Europe business segment revenue in Q3 2008 was $2.6 million, an increase of 62% year-over-year. Our new Asia Pacific business segment generated $207,000 of revenue in Q3 2008.

In terms of revenue concentration, TravelZoo had one group of advertisers under common control that accounted for 13% of revenue in Q3 2008. No other group of advertisers accounted for 10% or more of revenue.

TravelZoo's operating loss in Q3 2008 was $359,000, down from Q3 2007 operating income of $4.9 million. Operating margin in Q3 2008 was negative 1.9%, down from 24.8% in Q3 2007. TravelZoo's net loss in Q3 2008 was $1.8 million, down from Q3 2007 net income of $2.2 million. Reported net income was negatively impacted by an increase in our effective income tax rate.

Although TravelZoo had a loss before income taxes of $374,000 in Q3 2008, we recorded income tax expense of $1.4 million. The company recorded $1.8 million of income tax expense on the income from our operations in the US, and recorded a $421,000 reduction of income taxes related to the reversal of tax liabilities previously recorded for uncertain tax positions. The $4.8 million operating losses in Q3 2008 from our Asia Pacific and Europe business segments, and our operations in Canada, were treated as having no recognizable tax benefit.

Cash use for operations in Q3 2008 was $3.4 million. DSO, that's day sales outstanding, as of September 30th, 2008, was 52 days, up from 49 days as of June 30th, 2008. Total cash and cash equivalents as of September 30th, 2008, decreased to $15.8 million from $21 million as of June 30th, 2008.

In terms of head count, TravelZoo had 207 employees as of September 30th, 2008, up from 128 employees as of September 30th, 2007, and up from 191 employees as of June 30th, 2008. As of September 30th, 2008, 104 of our employees were North America, 51 employees were in Asia Pacific and 52 employees were in Europe. Average annualized revenue per employee in Q3 2008 was $363,000, down from $623,000 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 of advertising and promotional expenses and salary expenses associated with sales and marketing staff. Total sales and marketing expense in Q3 2008 was $7.3 million, down from $8.7 million in Q3 2007, and down from $7.6 million in Q2 2008. Sales and marketing expense as a percentage of revenue decreased to 45.4% in Q3 2008, from 47.2% in Q3 2007. The decrease from Q3 2007 was primarily due to a $1.1 million decrease in spending on marketing for SuperSearch, and a $286,000 decrease in spending on brand marketing campaigns. The decrease from Q2 2008 was primarily due to a $349,000 decrease in salary and employee-related expenses.

In North America, general and administrative expense was $3.8 million in Q3 2008, up from $2.3 million in Q3 2007, and down from $4 million in Q2 2008. The increase from Q3 2007 was primarily due to a $831,000 increase in salary and employee-related expenses and a $603,000 increase in professional services expense.

North America operating profit for Q3 2008 was $4.2 million, down from $7.1 million for the same period last year. Operating margin for Q3 2008 was 26.4%, compared to 38.5% 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 Q3 2008 was $1.3 million, down from $1.9 million in Q2 2008. The decrease in sales and marketing expense was due primarily to a $767,000 decrease in spending on subscriber acquisition campaigns. Asia Pacific general and administrative expense in Q3 2008 was $1.2 million, down from $1.4 million in Q2 2008. The decrease in general and administrative expense was due primarily to a decrease 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 a operating loss of $2.3 million in Q3 2008, compared to a operating loss of $3.2 million in Q2 2008, and an operating loss of $706,000 in Q3 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 Q3 2008 was $3 million, up from $2.1 million in Q3 2007, and flat compared to Q2 2008. The increase from Q3 2007 was primarily due to a $402,000 increase in salary expense, a $233,000 increase in search advertising, and a $165,000 increase in spending on subscriber acquisition campaigns.

In Europe, total general and administrative expense in Q3 2008 was $1.7 million, up from $946,000 in Q3 2007, and up from $1.6 million in Q2 2008. The increase from Q3 2007 was primarily due to a $185,000 increase in bad debt expense, a $146,000 increase in salary expense, and a $109,000 increase in office 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 a operating loss of $2.2 million in Q3 2008, compared to a operating loss of $1.4 million in Q3 2007. Though revenues increased by $992,000, the operating loss increased as both sales and marketing, and general and administrative expenses increased.

This concludes our discussion of TravelZoo's Q3 2008 financial results. We will turn back now to Holger, who will provide information on the growth of our reach and our growth strategy.

Thank you, Wayne.

During Q3 2008, TravelZoo added a total of 809,000 new subscribers to its email publication. In North America, we acquired 361,000 subscribers at a average cost of $3.73 per subscriber in Q3 2008, compared to 349,000 subscribers at an average cost of $3.39 in Q2 2008. In North America, TravelZoo's top 20 newsletter and newsflash email alert service had a net unduplicated total of 11.1 million subscribers at the end of September 2008. This represents an increase of 2% versus the same time last year. In Asia Pacific we acquired 194,000 subscribers at an average cost of $2.46 in Q3 2008, compared to 369,000 subscribers at an average cost of $3.37 per subscriber in Q2 2008. TravelZoo's top 20 newsletter and newsflash email alert service had a net unduplicated total of 1.1 million subscribers as of September 30th, 2008.

In Europe, we acquired 254,000 subscribers at an average cost of $4.52 per subscriber in Q3 2008, compared to 226,000 subscribers at an average cost of $4.89 in Q2 2008. In Europe, TravelZoo's top 20 newsletter and newsflash email alert service had a net unduplicated total of 2.1 million subscribers as of September 30th, 2008, an increase of 69% versus the same time last year. The costs 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. 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-sale advertising globally. For example, our sales force in the US now sells inclusions for our UK and the Canadian publications, and sales forces in Europe and Asia Pacific also sell 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 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, the UK and the US. Our plan is to aggressively leverage this global network to give TravelZoo users the very best information available.

Our Q3 2008 North America operating results were impacted more negatively than expected by a weak economy. As a result, we plan to cut costs in our North America business segment, and intend to reduce the speed of our investments in Asia Pacific and Europe. Otherwise, our strategy of developing TravelZoo in to a global brand will remain unchanged.

In North America, we 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 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 over the call back to the operator for the question-and-answer session.

(OPERATOR INSTRUCTIONS)

Our first question is from Ed Woo with Wedbush.

Yes, I had a question regarding whether there was any patterns or trends in the quarter regarding advertising spending, and have you seen anything change from the end of the quarter to today?

Ed, thank you. I will actually turn this question to Shirley, and then would like to ask Chris and Jason to comment as well, as this might be answered differently by each business segment. So Shirley, if you could go ahead and comment on North America, and then Chris and Jason, please feel free to add on about your regions.

Hi, Ed, thanks for the question. Let me just make sure I have it correctly. You're looking at the difference in advertising spending for this quarter?

I guess actually I meant revenue for TravelZoo, in terms of what there was any pattern as, you know, obviously the economy got a lot worse in September, and it got worse in October. I was wondering if there was any pattern to revenue during the quarter for TravelZoo, and whether it has changed at all in October?

You know, the economy is definitely a challenging one at this point for advertisers, but there is -- there is a couple of things that play. First of all, airlines, there is a few airlines that have gone out of business this year that we have been affected by and haven't gotten repeat advertising from, obviously, and vacation packagers seem to be squeezed a little bit more. On the other hand our hotel business is doing really, really well. So while there is downside to the economy for us right now, the upswing is definitely on the hotel side, and we are seeing some really increased - increased business there, and the desire for users to want that information and travels and the travel is still there as well. So it's advertisers coming to us with the right deals, which they have been doing very readily over the last six weeks or so, and have been pulling the results from it.

Ed, this is Chris Loughlin in London. Maybe I can answer for Europe. Interestingly, September was the best month that we've ever had here in Europe, and we saw a pick up in advertising from asset holders in particular. So Shirley already mentioned hotels, but we have been relatively sold out in our cruise inventory for some time in the UK now as well. Where we are seeing a bit of slow down is, I guess, the natural state of demand-type products. So for example the search product, the number of searches is down but the push media, the email, which is our core product, is definitely up in September.

Hi, Ed, this is Jason from Hong Kong. Asia Pacific, the mode of growing, our base is still very small. There is definitely no real impact to the revenue in the last quarter.

Okay. And the other question I had is, have you seen any change in the competitive landscape of other travel advertisers? Then the last thing I had was, what about the current state of adding subscribers, whether internet advertising is cheaper or more expensive o - you know, cost of subscriber acquisitions?

Ed, we have been facing in North America now competitors for the last few years. They come, some of them go. It's something that has become very normal for us. None of them, at least that's what we are hearing from our advertisers, none of them is reaching the broad audience that we built up over the last few years, in particular here in North America. So as you have heard from Shirley, particularly the hotels in this bad economic environment, which are looking to increase occupancy rates, turn to us as a source that can really bring them a lot of business relatively quickly.

I wanted to add on to your question earlier about how the industry downturn is affecting us. As I said in the past, it's really a double-edged sword; on the one hand, we see travel business that are affected by slowdown, we see they have a larger need to advertise deals. The deals we are promoting to our audience are getting better, hotels are increasingly turning to us to help them fill their rooms. We will see that - we are hoping to see this increasingly with other travel providers like packagers and cruise lines as well.

On the other hand, on the search side, we have heard from other colleagues at other travel companies, online travel companies, that traffic to travel websites has been decreasing since September. The traffic in general that we are seeing in September/October, particularly in our search products, which are people who actively say they want to go and travel somewhere, is certainly down versus summer. It's down more than what you would seasonably typically see.

But this down trend in search has actually amounted to a decrease in revenues in North America of almost $1.5 million year-over-year, which explains to a large extent why we are seeing such unsatisfactory results in North America. We have been however -- as we pointed out earlier in other calls this year, we have been working since the beginning of the year on a new search product, the meta-search product which is now better internally, and we are hoping that we can launch it next month, but we plan to launch it definitely this year, in 2008, and it will provide much better experience. There we will be starting from zero, so it's a growth opportunity for us.

The last question I had was, do you anticipate any changes in subscriber acquisition? Is it maybe cheaper for you to acquire new customers now that things like advertising across the board has decreased?

As you saw from the numbers, [EPS] has been remaining relatively stable. That is a good thing, as in the past few years we had seen [EPS] continuously go up. Do we are pleased with that. I would say some media placements have become cheaper, yes, that is correct. But also the placements that have been working very well for us, we have not seen that prices are going down. They are - as it often is, the placements that drive revenue, you know, if you think about what I said about the search volume, just the search volume and search traffic that you would be able to get from search engines such as google and Yahoo, the search volume has been going down, the number of companies competing to acquire these clicks that come from Google is still - remains still high, so you don't necessarily see prices going down there, at least not yet. But on the other side of the coin, that's a benefit for us because with our push media, we are able to provide incremental demand beyond the demand that already exists in the market.

Okay. Thank you and good luck.

(OPERATOR INSTRUCTIONS) Our next question comes from Michael Millman with Soleil-Millman Research.

More on the same vein, I suppose I was struck by how both Yahoo and eBay particularly pointed out the weakness that they were seeing in the travel sector for advertising. So maybe you can talk about degree or if there is something unusual that makes them stand out? And secondly, maybe would talk a little bit about what competition you are seeing from some of the OTAs who are now pushing advertising either on their social platforms, and even on their transaction platforms? And then could you explain what you mean by your meta-search product?

Mike, maybe let me start with the last question first. The product in the search space we are operating now, our SuperSearch product, allows the user to tell us where and when they would like to travel, and then we recommend them an option of websites where they should look for deals for that specific trip. However, the user has to visit each website individually. Over the past two years a new form of search for travel, which in the industry is called meta-search, has come up that allows users to compare websites all within one single search. These websites have become very popular, in particular this year, and this what our meta-search product will do as well. You don't have to visit a dozen different websites anymore to find the best price, you can do it all within one search. For us, we are very excited about this because we see high degrees of synergy between our deals publishing business and the meta-search business. For example, we are hoping that we can show travel deals within the search environment, and on the other hand the meta-search should allow us to provide better content for the deal publications.

In terms of your other two questions, overall as I mentioned it seems traffic to travel sites in general is down, so sites that are only looking on search, only booking and fulfilling travel needs for consumers are seeing decrease in traffic, and this could likely continue, a decrease in traffic and bookings. You probably have to ask the OTAs over their upcoming earnings calls how the economy affects their business. On our side, yes, we see a downturn in search but on the other hand we see a increasing need of travel providers to promote their inventory.

And last but not least, we are now seeing some of the best travel deals we have seen in the last four to five years, almost travel deals that are as good as they were after the period after September 11th, 2001. We hope that this is something that travel users will see over time, that even in this difficult economic environment, TravelZoo provides you with the opportunity to still go on a trip, because we are telling them about how you can do a cruise for $99 for four days, and not only how you have to spend $2000 to get away for a vacation.

Great, thank you.

We have no more questions at this time. I would like to turn the call back to Mr. Bartel.

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

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