Travelzoo (TZOO) 2009 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Travelzoo second-quarter 2009 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. Please go ahead, sir.

Thank you, operator. Good morning and thank you all for joining us today for Travelzoo's second-quarter 2009 financial results conference call. I am Holger Bartel, Chief Executive Officer. With me today are Wayne Lee, the Company's Chief Financial Officer, and Chris Loughlin, our Executive Vice President-Europe.

Hello, everyone. Welcome to our conference call.

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

First, we will discuss the Company's second-quarter 2009 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 Holger for an overview of the Company's Q2 2009 results.

Today, Travelzoo announced its results for the second quarter of 2009. We reported record revenues of $24.3 million; that's an increase of 12% over revenue of $21.8 million in the same period last year.

Diluted loss per share for Q2 2009 was $0.01, down from a diluted loss per share of $0.08 in the prior-year period. Subscribers to our publications grew to 16.7 million; that's up 1.3 million from versus the end of Q1 2009. This is the largest quarterly increase in the Company's history.

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. That will include headcount, expenses and operating results.

Thank you, Holger.

Our North America business segment revenue in Q2 2009 was $19.7 million, an increase of 3% year-over-year. Our Europe business segment revenue in Q2 2009 was $4 million, an increase of 57% year-over-year. In local currency terms, revenue increased 100% year-over-year. Our Asia-Pacific business segment generated $642,000 of revenue in Q2 2009, compared to $90,000 of revenue in the prior-year period.

I would like to add that revenues, costs and income from Fly.com -- our new meta-search engine -- are reported within the results of the respective business units of North America and Europe.

In terms of revenue concentration Travelzoo did not have any groups of advertisers under common control that accounted for 10% or more of revenue in Q2 2009.

Travelzoo's operating income in Q2 2009 was $1.6 million, slightly down from Q2 2008 operating income of $1.7 million. Operating margin in Q2 2009 was 6.4%, down from 7.7% in Q2 2008.

Travelzoo's net loss in Q2 2009 was $191,000, down from Q2 2008 net loss of $1.2 million.

The company recorded a $1.6 million of income tax expense on the income from our operations in the US. The $3 million loss from our Europe and Asia-Pacific business segments were treated as having no recognizable tax benefit. As a result, our effective income tax rate was 113%.

DSOs, that's Days Sales Outstanding, as of June 30, 2009 was 49 days, down from 50 days as of March 31, 2009.

Total cash and cash equivalent as of June 30, 2009 was $15.5 million, down slightly from $15.6 million as of March 31, 2009.

In terms of headcount, Travelzoo had 216 employees as of June 30, 2009. This is up from 191 employees as of June 30, 2008 and up from 206 employees as of March 31, 2009. At the end of Q2 2009, 109 of our employees were in (technical difficulty) in North America, 42 employees were in Asia-Pacific, and 65 employees were in Europe. Average annualized revenue per employee in Q2 2009 was $450,000, down from $456,000 in the same period last year.

Let's now look at the expense line items of our three business segments. For North America, for our North American business segment, which consists of our operations in the US and Canada, total sales and marketing expense in Q2 2009 was $9.6 million, up from $7.6 million in Q2 2008. Sales and marketing expense as a percentage of revenue increased to 48.6% in Q2 2009 from 40% in Q2 2008. The increase in sales and marketing expense from Q2 2008 was primarily due to a $914,000 increase in marketing for Fly.com, a $722,000 increase on subscriber acquisition campaigns, and a $619,000 increase in marketing for SuperSearch, offset by a $215,000 decrease in trade and brand marketing campaigns.

In North America, general and administrative expense increased to $4.3 million in Q2 2009 from $4 million in Q2 2008, due primarily to a $244,000 increase in legal and professional services expense.

North America operating profit for Q2 2009 was $4.5 million, down from $6.9 million for the same period last year. Operating margin for Q2 2009 was 22.6%, compared to 36.1% 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 Q2 2009 was $1.2 million, down from $1.9 million in Q2 2008. The decrease in sales and marketing expense was due primarily to a $567,000 decrease in spending on subscriber acquisition campaigns. Asia-Pacific general and administrative expense in Q2 2009 was $1.2 million, down from $1.4 million in Q2 2008. Travelzoo began operations in Hong Kong, Japan, China, Australia and Taiwan in 2007. Our Asia-Pacific is the segment incurred an operating loss of $1.8 million in Q2 2009, compared to an operating loss of $3.2 million in Q2 2008.

In Europe, total sales and marketing expense in Q2 2009 was $3 million, which was unchanged from Q2 2008. Total general and administrative expense increased to $2 million in Q2 2009 from $1.6 million in Q2 2008, due primarily to a $518,000 increase in salary and employee-related expenses.

Travelzoo began operations in Germany in September 2006, in France in March 2007, and in May 2008 began publishing a weekly top 20 list in Spain after having operated a sales force in Barcelona since November 2006. Our Europe business segment incurred an operating loss of $1.1 million in Q2 2009, compared to an operating loss of $2 million in Q2 2008.

We will now turn back to Holger, who will provide more information on the growth of our reach and our growth strategy.

Thank you, Wayne.

During the second quarter, Travelzoo added a total of 1.6 million new subscribers to its e-mail publications. Net growth in subscribers during the quarter was 1.3 million. In North America, we acquired 885,000 subscribers at an average cost of $2.15 per subscriber in Q2 2009. That compares to 720,000 subscribers that we acquired at an average cost of $2.29 in Q1 2009.

In North America, top 20 -- our top 20 newsletter and our newsflash e-mail alert service now have a net unduplicated total of 12.4 million subscribers as of June 30, 2009. This is an increase of 12% versus the same time last year.

In Asia-Pacific now we acquired 321,000 subscribers at an average cost of $2.12 in Q2 2009, compared to 183,000 subscribers at an average cost of $2.23 per subscriber in Q1 2009. In Asia-Pacific, Travelzoo's top 20 newsletter and newsflash e-mail alert service had a net unduplicated total of 1.5 million subscribers as of June 30, 2009. This represents an increase of 69% versus the same time last year.

Finally, in Europe, we acquired 408,000 subscribers at an average cost of $2.74 per subscriber, compared to 295,000 subscribers at an average cost of $3.09 in Q1 2009. In Europe, Travelzoo's top 20 newsletter and newsflash e-mail alert service had a net unduplicated total of 2.8 million subscribers at the end of Q2 2009. That's an increase of 50% versus the same time last year. The cost of our subscriber acquisition in North America, Asia-Pacific and Europe are all expense as incurred.

In 2005, Travelzoo began its growth strategy of expanding into selected international markets. We still 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 and we see a competitive advantage from being able to cross-sell advertising globally.

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. We have built a unique global network of producers and sales staff in 11 countries in North America, Europe and Asia-Pacific. Our plan is to aggressively leverage this global network to bring Travelzoo users the very best information available.

During Q2 2009, we began accelerating subscriber acquisitions in all three business units and are taking advantage of attractive prices for media in the countries we operate in. We have, in the past, found that audience and subscriber growth are a key driver of future revenues and profits. More subscribers in a larger reach allow us to promote more advertisers or to charge higher rates.

In 2008, we added a second element to our growth strategy by starting to publish deals on entertainment, including shows, events and other activities, in North America. We are now replicating this strategy in other countries as well, in our Europe and in our Asia-Pacific business segments.

The third element to our growth strategy is the launch in February 2009 of our meta-search engine at Fly.com. During the month of June, users performed over 2.4 million searches on Fly.com; that is an increase of approximately 85% over the previous month.

During the next two quarters, we plan to continue our strategy of investing significantly into subscriber acquisition, particularly in the US and in Europe. We will also continue to invest in Fly.com. We have begun cross-promoting the two brands, Travelzoo and Fly.com, and we hope to do even more so during the remainder of the year.

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 it back to the operator now for questions and answers.

Thank you, sir. The floor is now open for questions. (Operator Instructions). Ed Woo, Wedbush.

Good quarter on the operating cost control. Do you see that improving or do you see your investment in Fly.com and other initiatives to add subscribers, offsetting your operating cost improvement in international?

Good morning, Ed. Wayne will take that question.

Yes, hi, Ed. So as we've mentioned in prior calls, management -- we are making a concerted effort to control our operating cost and that in turn has allowed us -- has freed up more money for us to invest in subscriber acquisition and also promoting Fly.com.

I can't comment in terms of what our plans are in the future. One of the things on subscriber acquisition, it's difficult to predict, especially depending on if we find really good investment opportunities, we might decide for that quarter to just spend more.

You'll probably notice, Ed, that our numbers and subscriber acquisition costs are very, very positive. We achieved very low costs per signed up subscribers. We are very pleased about that and we want to take advantage of that opportunity. It's not only the cost of new subscribers; we are also measuring of course the quality of new subscribers that we sign on and the quality is good across the board as well. So we see this as an opportunity to really grow the audience right now. As I stated earlier, we hope that this will translate into higher revenues and profits in the future.

Good. The other question I have is have you seen much improvement in the travel market as it seems like the economy seems to be getting a little bit more stable?

Let me maybe talk about North America, and then I will pass over to Chris to say a few words about Europe.

In North America, the down economy has different effects on our business. On the one hand, there are travel businesses that are looking to promote more deals, they're looking to attract more guests. In particular, we see that in the hotel industry, but also some hotels are running out of cash. They are cutting their spend, so you cannot say across the board that it's beneficial for us.

We see that the mood among the hotels and among some other segments of the travel industry is improving. In other areas like the airlines, that's not so much the case.

Chris, how is that in Europe?

I think it is very similar. This is (technical difficulty) different countries; it does change a little bit. So in France, we don't really see much change on last year. In Spain of course occupancy at the hotels is rather weak. This time last year, hotels in the Canary Islands and [Tenor Reef] were sold out. This year, they are sitting at 30%, 40% is what we are hearing. That of course presents a great opportunity for Travelzoo to promote these hotels and stimulate incremental room nights.

We are also doing these things on a transcontinental basis as well. We just helped in the UK, so just from the UK audience, we helped a Las Vegas resort hotel take 4200 room nights. That was without airfare. So consumers in the UK, in Germany, France, Spain -- they want to travel. I think they are looking for a deal and they are self packaging and they are signing the deals. The asset holders are putting the deals out there for us, so those are all positive. I think that is reflected in the numbers you see here in Europe this quarter.

Great, thank you.

Malindi Davies, Susquehanna Investment.

Good morning. I have a question about Europe and then a question about Orbitz.

So first of all, was the sequential growth in Europe due to a particular advertising campaign that might be a little bit more lumpy over the rest of the year? Then also, is Orbitz's new marketing newsletter which, they compile top ten deals and e-mails about, is that competitive with yours, or is it something -- should we think about it as something different?

It is Chris Loughlin here. I will just comment on Europe first of all. Holger, is that okay?

Yes, go ahead, please.

Okay. No, in fact, the growth in Europe this quarter really stems from just everything coming together. You have to remember that we started these businesses -- they didn't all start in one go in May 2005. We started Spain and we just put a country manager down in Spain, so we started Spain a year ago, put a country manager down there in January or February of this year.

Of course, we get great leverage when we put a senior executive into a market. And so now you see much better productivity coming out of Spain.

In Germany, we appointed a new country manager about six months ago. Again, you see great, great results from having such a strong leader in the market.

Also, the other thing you're seeing in Europe is just really inflection points in audience growth. When you are selling advertising and you've only got 200,000 subscribers in a market, of course you don't have much leverage. But as soon as you have, say, 500,000 -- or in fact now in Germany we have 500,000, in France we have 600,000, in Spain 200,000, in the UK over 1 million. These are big numbers, and they are very attractive for travel companies, particularly principals who intend to stimulate response.

The last thing about Europe is of course it is seasonal, and the run-up to July-August is the biggest booking period in Europe, so that also could have an influence on the results.

Malindi, regarding your question on newsletters of OTAs, I don't want to comment on a specific company, but if you look around, all the online travel agents for years, actually for over a decade, have been sending out e-mails with travel deals. In fact not only the online travel agents, but airlines, any kind of travel business seems to directly send out some deals and special offers. Even some airlines send out e-mails with deals on cruises. So that competition has always existed and they will continue to exist. The shape and format of these e-mails will change over time; some of them might look closer to what we do.

In essence, it is really about the quality of the e-mail. It is interesting. Just yesterday, I sent an e-mail to my staff because I saw online some notes of how users had commented on the content of a travel deals newsletter of another company. The users were very disappointed; they said this is a bogus offer; it does not exist. They said this deal is really not great. I can get it much cheaper on the other sites.

So you know, at first glance, all of these travel deals and newsletters look very similar, and you think you know, it is easy to just sign up a subscriber, send them deals and people will book. That's just simply not the case.

Over the years, our subscribers have learned that the quality of our newsletters is very good. We operate several test booking centers across the world that verify that offers exist. We also do the most diligent research on travel deals before we e-mail them out. We verify they are really the best in the market. We are very hard-pressed to speak with our advertisers and very hard on our advertisers not to e-mail anything out that we don't consider a fantastic deal. We believe that strategy will pay off in the long run, and it is something that is very difficult to replicate by other companies.

Just to wrap on Holger point, I am a guy here who has launched a business into four markets in Europe, and I can tell you it has not been easy to do that on our own with all of the internal know ledge we have ourselves. I worked in the US business for quite a few years before I came over here.

So if we find it difficult ourselves to execute when we are starting these businesses up, and you can see it takes a few years to get going, good luck to the other guys who try to copy us.

Let me maybe add one more thing about Europe, Malindi, because I'm reading of (inaudible) I am hearing from investors what's going on with their investment Asia Pacific. You're still not making a profit; what's going on there?

We are actually rather pleased with what Chris achieved in Q1 and Q2 in Europe. You see revenues in local currency terms have grown in both quarters 100%.

I think what's important to understand is that, if the business in Europe for example is going very well, then of course we are more inclined to invest more into subscriber acquisition to drive future revenues. And the situation we have in our business segment like that is that the cost, typically the cost of your staff, the sales staff, the production staff, doesn't increase as quickly as revenues increase as a result of an increasing audience. So the strategy in Europe of, for example, this quarter investing more into subscriber acquisition is one that really is in our opinion a very smart one. Yes, it results in the short term again in a loss that we reported for the quarter in Europe because the subscriber acquisition expenses are incurred as expenses, but we believe it really creates a solid foundation for growth in the future and for future profitability.

Of course, we want to achieve profitability as quickly as we can, but if we have fantastic opportunities as we do have right now in Europe to acquire high-quality subscribers at relatively good cost, we would be stupid not to take advantage of that opportunity.

Thank you.

Now I would like to turn the call back over to Mr. Bartel.

Ladies and gentlemen, we thank you very much for your support. We look forward to speaking with you again next quarter then, so 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.