Travelzoo (TZOO) 2009 Q4 法說會逐字稿

Good morning everyone and welcome to the Travelzoo fourth 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, Mr. Holger Bartel, Travelzoo's Chief Executive Officer. Sir, you may begin.

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

Hello everyone. Welcome to our conference call.

Hello everybody.

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

I would first like to remind you that all statements made during this conference call and presented in our slides 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 is 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. Please note that this call is being webcast from our Investor Relations website at www.travelzoo.com/earnings. Please refer to our website for important information including our earnings press release issued earlier this morning along with the slides that accompany today's prepared remarks. 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. For the format of today's call, we will begin with a discussion of the Company's fourth quarter 2009 financial performance. In the second part, Holger will provide a brief overview of our growth strategy. We will then conclusion with a question and answer session. I will now turn to Holger for an overview of the Company's Q4 2009 financial performance.

Today Travelzoo announced its results for the fourth quarter of 2009. So please turn your please turn your attention to slide four now. We will start with the presentation. We reported record revenue of $23.8 million, an increase of 21% or revenue of $19.6 million in the same period last year. Operating income from continuing operations for Q4 2009 was $3.5 million. That's up 47% from the prior year period. Subscribers to our publications in North America and Europe grew to $16.8 million, up $500,000 or 3% versus the end of Q3 2009 and up $3.3 million or 25% versus Q4 2008.

Turning to the next slide, slide five, one might ask, why if operating income increased 47% year over year, why are our earnings per share down to $0.09. There are two factors really driving this. First, as you can see in the chart at the bottom, we realized a currency gain of $424,000 in Q4 2008 which turned into a loss of $94,000 in Q4 2009. Second, when it comes to subscriber acquisition, a much larger portion in Q4 2009 went into Europe. But the losses in Europe don't have a recognizable tax benefit so the effective income tax rate jumped from 39% to 56%.

Turning to slide six, with the sale of our Asia Pacific assets now complete, the Asia Pacific business segment is treated again in the quarter as discontinued operations. And all numbers discussed during the call today will focus on continuing operations. On this slide here we present the quarterly earnings per share from continuing operations in 2009, compared to 2008. Now back to Wayne to discuss additional information for the group in our North America and Europe business segments.

Thank you, Holger. Turning to slide seven, our solid year over year revenue growth continued in both North America and Europe during Q4 2009. Our North America business segment revenue business revenue in 2009 was $19.3 million, an increase of 12% year over year. Our Europe business segment revenue in Q4 2009 was $4.6 million, an increase of 91% year over year, and in local currency terms revenue increased 84% year over year.

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 segments of North America and Europe. In terms of revenue concentration, Travelzoo did not have any group of advertisers under common control that accounted for 10% or more of revenue in Q4, 2009.

Over on slide eight, we were able to increase our operating income from continuing operations from $2.4 million in Q4 2008 to $3.5 million in Q4 2009, in spite of a $900,000 increase in spending on subscriber acquisition, and $1.5 million of increased expenses related to Fly.com. North America operating profit for Q4 2009 was $5.3 million, up from $3.7 million for the same period last year. The increase in the operating loss for our Europe business segment from a loss of $1.3 million in Q4 2008 to a loss of $1.8 million in Q4 2009 was due primarily to increased subscriber acquisition expense.

Turning to slide nine, on the cash management front our DSO, that's Days Sales Outstanding, as of December 31, 2009, was 46 days, down from 48 days as of September 30, 2009. And our total cash and cash equivalents as of December 31, 2009, was $19.8 million, up from $15.7 million as of September 30, 2009.

Slide ten shows a quarterly increase in our headcount. Travelzoo had 193 employees as of December 31, 2009. This is up from 163 employees as of December 31, 2008; and up from 185 employees as of September 30, 2009. Average annualized revenue per employee in Q4 2009 was $493,000, up from $481,000 in the same period last year.

Let's now look at the expense line items of our two business segments beginning with North America on slide 11. For our North America business segment which consists of our operations in the US and Canada, total sales and marketing expense in Q4 2009 was $8.1 million, or 42% of revenue, down from $8.4 million or 49% of revenue in Q4 2008.

General and administrative expense increased to $4.6 million in Q4 2009 from $4.3 million in Q4 2008. But as a percentage of revenues decreased slightly to 24% from 25%. Total North America operating expenses remain flat at $12.7 million and as a percentage of revenue decreased to 66% in Q4 2009 from 74% in Q4 2008.

Our next slide shows that in Europe total operating expenses as a percentage of revenue decreased from 151% in Q4 2008 to 135% in Q4 2009, in spite of a $1.2 million increase in spending on subscriber acquisition, a $600,000 increase in salary expense due to increased headcount, and $500,000 expenses for Fly.com. On an absolute dollar basis both our sales and marketing and general and administrative expense increased in Q4 2009 compared to Q4 2008, but as a percentage of revenue both decreased compared to the prior year period.

Turning to slide 13, during the fourth quarter, we continued our aggressive subscriber acquisition as we see our audience growth as an investment into future revenues and profits. We ended 2009 with 16.8 million subscribers, an increase of 25% from the end of 2008. During the quarter we added a total of 1 million new subscribers to our e-mail publications in North America and Europe. Net growth in subscribers during the quarter was 500,000.

The next slide shows how improved execution has helped drive down our acquisition costs compared to the prior year. In North America, although our subscriber acquisition expense in Q4 of 2009 decreased by 26% year over year, we added 27% more subscribers in Q4 2009 compared to Q4 2008, as the average cost per subscriber decreased by 41% from $2.75 to $1.61.

In Europe, we increased our subscriber acquisition spending by 232% year over year, but due to our continued focus to add subscribers in Germany where the average cost per subscriber had been the highest of all the countries, we were able to add 177% more subscribers during the quarter. The average cost per subscriber increased by 20% from $3.32 in Q4 2008, to $3.97 in Q4 2009. The cost of our subscriber acquisition expense in North America and Europe are expensed as incurred.

This concludes the first part of our presentation. We will now turn back to Holger for part two of our presentation and an overview of our growth strategy.

Let's first look at North America. We are on slide 16 now. As you see, our publication business which includes Top 20, Newsflash, our websites, we saw good revenue growth there, 17% year over year. We were quite pleased with that. SuperSearch on the other hand was challenging. First, Q4 is seasonally a slow quarter. And second elimination of booking fees by many online travel agents is hurting revenues and profitability. Finally, Fibercom revenue was up yet we are still incurring significant losses as we are investing in the product and in marketing. Overall though we were still able to improve our operating margin in North America significantly from 21% to 28%.

Turning to slide 17, as I explained in the past there are really three elements of growth strategy. First, we believe that multiplying bundles of business in attractive international markets is a great opportunity for us. We are looking to build Travelzoo into a global brand and we think there are opportunities to drive global contents to Travelzoo fans around the world.

Second, we are expanding the scope of our Travelzoo business into the areas of entertainment. Entertainment includes, just to name a few examples, deals on Broadway shows or deals and discounts on sporting events.

The third element of our growth strategy is Fly.com, our meta search engine. We launched Fly.com at the beginning of 2009. And we believe that meta search is a great opportunity for us. It offers attractive economics, as well as great synergies with the Travelzoo business.

Slide 18 shows you the progress of our international expansion. In 2009 we had strong focus on subscriber growth in Europe. As you see in North America, our audience who grew by 17% year over year. In Europe, Travelzoo's top 20 newsletter and Newsflash e-mail alert service had a net unduplicated total of 3.6 million subscribers at the end of the year. That's an increase of 62% versus the same time last year.

Slide 19 shows you how our international expansion and our focus on growing subscribers is impacting our EPS from continuing operations. On the left-hand side of the slide, we show you operating income from operations excluding subscriber acquisitions. North America and Europe add up to $0.38 per share. In the middle we show you how subscriber acquisition expense affects EPS. There were $0.06 per share in North America and $0.11 per share in Europe. This takes us to $0.21 per share on operating income before taxes, and in taking off taxes of $0.12 we arrived at EPS from continuing operations of $0.09 per share.

The next slide shows how increased spending on subscriber acquisition during 2009 has impacted our EPS. Although we spent more on subscriber acquisition in Q4 2009 compared to Q4 2008, we were still able to increase our operating income on a per share basis to $0.21 up from $0.15. But as I mentioned at the beginning of our call due to the currency gains in Q4 2008, and the higher income taxes in Q4 2009, our income from operations net of tax decreased to $0.09 per share in Q4 2009.

Now I will ask Chris to provide some more incite into Europe and take the UK as an example of how growth in subscribers and revenue growth affects the profitability overtime.

Thank you, Holger. Our success is a function of the scale of our subscriber base and time in the market. As we gain critical mass and develop advertiser relationships, we are able to move our business units to a profitable position and here you see despite significant investments in the fourth quarter 2009 in subscriber acquisition in Fly.com, the UK business ended the year with a profit. You can see that on the right-hand side there.

Going on to slide 22, I just want to show you what happens in the market as we get larger. This chart represents one week in January of 2010 where Travelzoo is essentially shown as the largest e-mail service in the UK market. And with having that market leading position, we are able to attract more advertisers, extract higher rents and achieve greater word of mouth.

Moving on to slide 23. This shows that our revenue acceleration grew faster in cost than most markets that we operate in. In Q4 of 2009 with the exception of the UK, where we accelerated investment in subscriber marketing by $555,000 compared to the same period last year, and hired new staff including a new Managing Director in the UK. Had we not increased subscriber acquisition by $555,000, expenses would have grown less than revenues and the margin would have been more positive, in line with the improvements we are seeing in other markets. Here you can see that Canada is operating now with a margin of 39% in Q4 2009. Back to you, Holger.

Finally to slide 24, I would like to conclude our prepared remarks today by talking about areas which we will focus on in in 2010. First, Europe will continue to be a key focus of our investment activities again in 2010. We believe the opportunity in Europe continues to be very strong. We are off to a great start and we will continue to invest and grow the audience which we hope will result in increasing revenues and will help us move closer into positive income and contribution.

Second, you have seen that we have invested quite a bit this year in growing the North America audience. In 2010, our focus will be on monetizing this larger audience much better. Third, we are looking at more aggressive reselling to a global audience. This means, for example that, we would go to a hotel in Paris and tell them to run a promotion in North America or in Asia Pacific. It also means that we will produce more attractive global content for our subscribers. Next, we will continue our expansion into the area of entertainment offers. And, last but certainly not least, we will continue to focus on growing the Fly.com audience and revenues in 2010. 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.

Thank you. The floor is now open for questions. (Operator Instructions) And we'll take our first question from Ed Woo with Wedbush.

Yes, great quarter, guys. I had an administrative question. What's the $7 million in prepaid? And the second question I have is, can you provide any type of data point in terms of how Fly is tracking both in the US and in Europe? I know you launched it recently. Thank you.

Wayne will answer the first part and I will address the second.

Yes, hi, Ed. So, due to the sale of our Asia Pacific business segment, we recognized a tax benefit for the year. And so this resulted in an over payment of our income taxes. So of the $7 million, $6 million is income tax receivable.

So for Fly.com, first of all we don't want to provide a lot of details. It's a very, very competitive industry and also the revenues are still comparatively small compared to the rest of our business. We are really still in the investment phase there. We are not quite happy, actually we are quite happy now with the product. But in fact our internal tests have shown that Fly. com does really a great job at finding lower fares compared to competitive sites that are out there. But on the revenue and traffic side, we are not really that happy yet. Revenues have grown from Q3 to Q4. That's good. Because Q4 is seasonally a pretty slow quarter. Yet we are not yet at the traffic levels that we were hoping for. So as a result of that, we are still incurring a significant loss as this business is a business with relatively high fixed costs. Our focus in 2010 thus will be to better communicate the quality of the product and to drive more traffic and revenues in a very cost-effective manner, of course. On the other hand, yes, you said we launched Fly.com in the UK last fall. We've actually had great feedback from users as well as partners and advertisers. Chris, do you have any comments?

Yes, actually I met with one of the largest airlines in Europe just last week. They told us they were getting a 14% conversion rate from a click at Fly.com. Which is remarkable. In advertising if you get 2% you are happy. So 14% is unbelievable. And the user feedback has been very, very positive. We are doing this thing, we are doing these Twitter alerts as well and that's really become very popular very quickly. So you can sign up for a Twitter account out of New York and find out what the latest fares are. We feel that by capturing the people right at the beginning of the curve, the innovators, they are starting to spread the word. And that's primarily coming through that Twitter strategy.

Thank you and good luck.

Thank you.

We will take our next question from John Lewis with Osmium Partners.

Hi, guys, well done and I thought your investor presentation was extremely helpful. I didn't quite catch the answer to Ed's first question regarding, I think it was the $5 million in prepayed expenses. I think it said it had to do with prepaying taxes. And so would we assume in late Q1 or early Q2 that you would have a $5 million in positive cash flow?

Yes, hi, John. So the, of the $7 million of prepaid expenses at year end, $6 million is income tax receivable. So it will either go to reduce our estimated tax payments during 2010 and or result in a refund, so.

Got it. Okay. I guess, let's see, the other thing I was going to ask you, I know obviously the weakness in the economy, I believe you haven't had any price hike in terms of your ad rates for several years. Can you give any comments if there's a rate hike for this year or just your general thoughts on this, please.

John, first of all, the rate increases, there are some rate increases on some products. There are a lot of the rates remain the same and other rates are decreasing. We adjust rates every year depending on what the demand is for certain placements. Overall I'd like to emphasize again we are really very pleased with how the publishing business dipped in Q4 2009. Revenues there were up 17% year over year in this economy and that's a result of on the one hand our investment in subscribers. On the other hand, it's a result of the great job that our team in North America has done. And I think in this economy can really help travel companies stimulate new incremental demand and really help them fill hotel rooms, fill cruise ships, fill airlines seats and that's really reflected there and so we are quite pleased with that. So we want to be careful not to hike rates up too quickly because it's really not good for our partners. Ultimately rates at hotels are down. So that also means even if they pay us the same price, they need to sell more hotel rooms in order to have a similar return on investment.

Got it. That's helpful. I guess my last question kind of in events entertainment. I noticed recently on your site you have, I guess a box that says you can search nor deals two and from. I thought that was pretty interesting. I guess, can you just talk about how the events entertainment piece of that growth initiative is playing out so far?

It's really growing quite well in that we still believe we are just scratched the surface. We have done a lot of work in, of course, shows and Broadway shows. We've done more in sporting events this year, concerts and so forth. There is really so much out there that we haven't really had the chance to work with. So it's an area that, yes, we are very pleased with the growth this year. And we are quite excited about what the future will bring in that area. And most importantly, we are not building a completely new audience for this business. So the incremental revenues that we are bringing in from also distributing and entertainment deals to our audience have a much better impact on our bottom line than if we just started a completely new business. So it's a business that will bring incremental revenues and a lot of these incremental revenues will really benefit our profitability.

Holger, if I may add, John, we launched the shows and events business into the European markets in the middle of last year. And just to give you two little case studies. In the fourth quarter, we had Chelsea Football Club coming up with offers for us which we sent out and that went phenomonly well and even last week we had the London Symphony at Festival Hall. It's really interest to go see. You can really convince people to see Chelsea Football on the other hand and on the other hand they are going to the symphony. In the British culture the guy who goes to the Chelsea football club is not the guy that goes to the symphony. In both cases, they had sold out of the allocation that they allotted to us. So, it really resonates with the audience.

I really appreciate that and thanks for your time.

We will take our next question from Noah Steinberg at G2 Investment Partners.

Great quarter two. Quick questions for you. First one, quick one the balance sheet. I notice that the prepaid expenses and the other assets is up by a nice amount in the cash flow. And I was wondering if you had any other color on what that was and why it was up?

Sure, Noah. So I think it's the same question as the other two. So the increase that prepaids was due to a $6 million income tax payable at the end of the year. We recognized the tax benefit on the sale of our Asia business. So it will help to offset our payments in 2010.

Okay. And I know you guys aren't giving guidance. Just want to understand how you're thinking about the business. You are getting closer to profitability in Europe. And you said that in your prepared remarks. Just wondering, does that imply that you don't think Europe is going to be profitable next year? Is there any point where it turns the corner on profitability?

Chris, you want to talk about that?

Sure, if you extract the subscriber expense out of the fourth quarter and just extract the subscriber expense, you are essentially looking at a breakeven business, right? And if you take out Fly.com, then you are looking at a profitable business. So, as a business if we take the decision, okay, let's slow down our subscriber expense fairly rapidly, we could turn the business to a profit pretty much at any time based on what happened in Q4. For the long-term benefit of the business, if you are seeing revenues, just go through these revenues, Q4 2009 was up 91% And Q4 2008 we were only up 65% and the year before that we were only up 52%. So, actually in dollar terms we accelerated in the last 24 months. So if we are seeing our revenues accelerate then we are not going to slow down our subscriber expense. Of course, we are realistic and we want to get the business to a profit as quickly as possible. But we also want to insure that we extract the maximum value, take the most dominant market position and that's going to benefit us and shareholders in the long run.

I know you said in the slide that Germany is more expensive. Is the emphasis on Germany over the next coming quarters or is that, is the investment in Germany slowed down?

No, I think we will maintain the same pace in Germany. We've been pretty aggressive there. You see that the revenue growth was 160%. So the fastest growth apart from Spain which is a relatively small market. Germany really accelerated there in the fourth quarter. So I don't think that, I don't think that there's any change in plans for Germany. Interestingly, it's just ironic that the number we came in on the European subscriber acquisition in Q4 overall was 3.97%. If you take the average of the prior eight quarters it's 3.97%. So subscriber acquisition is pretty much running on the line right now. The way that we improve that is by finding better media deals and improving our efficiency. And we are transferring knowledge across the markets, you see the improvements we made in the US and we just need to do more of the optimization in the business.

And just to add on to this, yes, subscriber acquisition in Germany is very high. This is a result of high media costs. But at the same time we also are seeing as a benefit on the revenue side. So rates and revenues we generate per subscriber in Germany tends to be a much higher than in other countries that we operate in. So it's just that when you look at the average subscriber acquisition cost across all countries in Europe and the number goes up. That was partially driven by a larger percentage of spend spent on Germany. We are really excited about Germany. We have a fantastic team over there. We are very pleased with the growth we are seeing there. So it's a market that we will continue to invest in. It's very difficult. We are not planning to, we grew Europe subscribers very much in 2009. We have a plan of what we want to do in 2010. It's just really difficult to say exactly how that, how will that impact the P&L. And when exactly we will reach profitability. But you can be sure, it's our goal to reach profitability as quickly as we can.

Just a last one to understand this, you are investing a lot in Europe and it's definitely showing up in the sub count which has been accelerating over the last four quarters if we look at it year over year. Do you think that kind of growth can continue at this clip? Or do you think kind of low hanging fruit has been picked and your growth kind of tapers off from here?

Maybe I can answer that, looking in the UK and in Germany in January of 2010, we saw the fastest rate of subscriber growth. If you take those growths combined that's after five years. So, no, I don't think it's slowing down right now. What is the market opportunity? Europe overall has more than 300 million people. So roughly 150 million adults just doing the quick math, the market is in fact bigger than the United States when it comes to travel GDP. So we are not thinking or worrying about the end right now. We are really capturing as much as we can as quickly as possible. And it's certainly not a concern for us at this stage.

Okay. Thank you, ladies and gentlemen. Again, we thank you for your support and we look forward to speaking with you again next quarter. And have a great day.

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