Travelzoo (TZOO) 2010 Q1 法說會逐字稿

Good morning, everyone and welcome to the Travelzoo first-quarter 2010 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, 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 first-quarter 2010 financial results conference call. I am 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.

I would 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 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, Holger will review management's prepared presentation, and we will then conclude with a question-and-answer session. If you please now open our management presentation, which is available at www.Travelzoo.com/earnings, I will now turn the call over to Holger.

Our presentation will fall in two parts. First, I will talk about the financial performance, highlights of our financial performance and then second, I will provide an update on our growth strategy.

Let's all turn to slide 4. I just want to highlight key performance metrics for Q1 2010. We are quite excited our revenues grew by 24% to $28.5 million. That is a new record for our Company. Subscribers grew to 17.8 million, and our earnings per share are up from $0.13 to $0.15 year-over-year. That is a 15% increase.

On the next slide, I am providing more detail on the operating income. As you've heard, operating income for the Company in Q1 2010 was $5.2 million. That consists of operating income of $6.2 million in North America. In Europe, our operating loss decreased from $1.3 million to $1 million. We then have $200,000, which is primarily a foreign currency loss, taxes of $2.5 million and our net income from continuing operations was $2.5 million. Our effective tax rate is slightly down from 53% to 50%.

On slide 6, let's look at revenues first. Revenues continued to grow in North America. Year-over-year growth is 12%, very similar to previous quarters. In Europe, we are quite excited that even though the base growth, we can still maintain the pace of doubling revenues year-over-year. In Q1, again, our revenues doubled versus the previous year. In fact, they increased 107% in US dollars. In local currency, they increased 91%.

Slide 7, I already mentioned in our press release that we continued to invest in subscriber acquisition, as well as in Fly.com. If you compare Q1 2010 versus the previous year, we actually spent over $1 million, exactly $1.1 million more on subscriber acquisition in 2010 compared to Q1 2009.

Also Fly.com added over $2 million in expenses versus the previous year. We started Fly.com in February 2009. Nevertheless, in spite of these investments of over $3 million, our operating income is still up from $4.5 million to $5.2 million.

Slide 8 gives us more insight into operating expenses. First, operating expenses in North America. They increased by $1.8 million, and as a percentage of revenue, they increased from 65% to 67%. What is driving this? The two main reasons for the increase are an increase in salary and employee expenses and an increase in staff that is approximately $700,000, and then it is an increase in marketing for Fly.com that is another $700,000.

On the next slide, we are looking at operating expenses in Europe. We also saw an increase there by $2.8 million, up as a percentage of revenues. Operating expenses actually decreased from 140% to 111%. We are getting closer to the 100% mark, which is actually where we want to be as soon as possible because that represents our breakeven point.

What is driving the increase in operating expenses in Europe? It is an increase in staff, also increase in salaries and employee expenses that adds up to about $900,000. And we also invested significantly more on subscriber acquisition in Europe. That is an increase of $800,000 year-over-year.

Page 10. Our headcount increased from 193 to 201 this quarter, so only very slightly, but since our revenues grew much more than that, we actually increased productivity. In fact, revenues per employee are now at $568,000, which is the highest level we have seen in almost two years.

Page 11. I would like to talk about our audience in North America and Europe, our audience increased by one million subscribers. On the left-hand side, the increase on the far right (inaudible) bars is a year-over-year increase. The last one is obviously only a quarterly increase, so you see we are growing at a similar pace as we did in all of 2009. The right-hand side, we actually added 1.5 million new subscribers. We unsubscribed half a million subscribers, so the net increase is one million.

Finally on page 12, a look at our cash management. There is some really good news here. DSOs, days sales outstanding, decreased further and are now at 44 days. Very happy about that. And our cash balance also jumped. It is now over $30 million at the end of Q1. That increase is primarily due to the sale of our Asia-Pacific business segment, which occurred in Q4 last year and related tax benefits to that.

Let's now in the second part look at our growth strategy. On slide 14, I am summarizing again. What is our growth strategy? We have three elements. First, we want to multiply the Travelzoo business in attractive international markets. We want to build more global content, and we want to build and expand our global brand.

Second, we are expanding our content and product offering into entertainment. That is for example Broadway shows, sports events. And third, last year, we launched Fly.com, a meta search engine where we see great synergies with the Travelzoo publishing business. We also believe in the long run it is an opportunity with attractive economics.

Let's first look at international expansion. Slide 15 takes us back to 2005. Five years ago, we really operated only in the US, and we had just launched a small operation in the UK. If you go to the next slide on 16, you see how we've been growing in Europe primarily, as well as we opened operations in Asia-Pacific. At the end of 2008, we were at 14.6 million subscribers around the world.

Slide 17 shows you where we are today, actually end of Q1 2010. We continued our growth in North America, 18% year-over-year, but in Europe is really where we are very focused on growing our audience very rapidly, 60% year-over-year. Asia-Pacific, as most of you know, is now independently operated under a license agreement.

Worldwide, the Travelzoo brand now reaches over 20 million subscribers. That is a great audience. There is not a lot of media companies, particularly in travel and entertainment, that I believe can offer this kind of reach to advertisers. In North America and Europe alone, we are reaching 17.8 million subscribers.

The international expansion however comes at a cost. On slide 18, you see that operating income from North America and Europe, excluding subscriber acquisition, would have been $0.54 per share. Once we take subscriber acquisition expenses off and other expenses, we arrive at an operating income before taxes of $0.30, taxes are $0.15 per share, so our EPS of $0.15.

The next two slides really excite me. I love those two slides. Slide 19 and slide 20 talk about how we are making progress in our international expansion, and everything is going exactly as planned. Slide 19 shows you for the UK as an example how, over time, the increase in subscribers drives revenues and how the revenue growth ultimately drives operating income. The white bars are quarterly numbers. It's really exciting to see that in Q1 2010, we generated a profit of GBP500,000 just a quarter only in the UK. So you see, our strategy of building subscribers, investing in subscribers, generating revenues from them and ultimately turning a profit is working very well in the UK.

On slide 20, I would like to show you where we stand in the other countries. The UK and Canada were profitable. In fact, both in the UK and Canada, as you see towards the bottom of the slide, our operating margins doubled year-over-year. In the UK, we are now at 23%. We exclude Fly.com from this chart just because it is not part of our US publishing business.

Canada is now at an operating margin of 46%. Germany, France and Spain, which we launched much -- excuse me -- Germany, France and Spain, which we launched much later, are still incurring losses. However, as you can see, they are decreasing.

On the last slide, number 21, I would like to summarize again where our management focus is. Our international expansion is very successful and we'd like to continue the growth in Europe. We want to move these operations closer to profitability and achieve a profit all across Europe as soon as possible. We would like to monetize the larger audience in North America and increase efficiency and operating margins in our core business.

With 20 million subscribers now worldwide, we are going to sell more aggressively the global audience, and we are already producing more and more global content. The expansion into entertainment will continue, and we want to grow our Fly.com audience and revenues. And of course, we also intend to improve earnings per share as our revenues continue to grow.

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.

(Operator Instructions). Ed Woo, Wedbush.

Great quarter, guys. The question I had is, first of all, have you noticed any change in the competitive landscape either for your newsletter business or possibly with Fly.com? And second of all, how would you characterize the overall environment in the travel industry, either with travel providers or for travel, online travel advertising? Thank you.

Ed, I would like to give this to Chris.

Hi, Ed. Thanks for your question. I don't think much has changed in the -- specifically about Fly.com, right, so I don't think much has changed in terms of the competitive landscape. You've got a couple of large players in the market. You compete in that space on the technology product. We think we've got a great product on pricing, so the price of the flights you can offer. We've got some outstanding prices and I'm not sure if you saw that news that we now also have the OpEx prices in the Fly.com engine in the US and speed. And recently, we ran some tests in Europe where we now feel that we are, in fact, the fastest amongst the four incumbents. So on competition, I think we are doing a pretty good job and we don't see anyone new. On -- sorry. What was your second question?

Yes, how do you characterize the overall environment for travel right now, the industry, either for travel providers or for online travel advertisements?

Well, I think you are seeing strong demand across the board in the western markets at this time. Obviously, the ash cloud had an impact on all travel companies over the last 10 days or so, and I think you can see there has been an awful lot of disruption. So probably who benefits from that, it's the domestic providers.

We recently, actually on Friday, we went out to our UK audience and asked what was the impact on our subscribers. 25% of subscribers say that they were, in fact, impacted by the ash cloud, but they continued to plan to travel. 80% say it is not going to have any negative effect on their summer plans and a lot of people who were going to book during that period booked domestic travel. I was at a conference last week here in London. The outlook certainly seems to be a lot stronger than last year.

Great. Thanks and good luck.

(Operator Instructions). Noah Steinberg, G2 Investment Partners.

Great quarter. Just a quick one on pricing. Outlook stronger than last year in terms of overall travel spend -- advertising spend by your customers. Are you seeing any opportunity to raise price?

Hello, Noah. I guess two answers to that, really. First of all, I think pricing -- our ability to price and increase prices really depends on the economy overall and in particular, the travel industry, as well as competition.

On the one hand, we definitely see that the travel industry is still, although it is improving, is still in very bad shape, particularly in the hotel business. As we work with so many hotel partners all across the world, their revenues -- their RevPAR, revenues per average room, are down. And we just don't feel it is the right time right now to significantly increase prices. We still provide a lot of great returns for them in this difficult time. But you also have to take into account that the rates just overall are lower.

In terms of -- it doesn't mean, though, that our revenues will not increase because I am not sure everybody understands how we are actually pricing. As our audience continues to grow, it means that, for example, let's say we increase the audience in North America from 10 million to 12 million, very few of our advertisers actually purchase the entire audience. So a lot of our advertisers purchase increments of that audience. So let's say, for example, 2 million. Now what that means is that we can actually send in the newsletter to the 12 million people, we can send six offers to 10 million people, we could have only have sent five offers. So even if the price, the rate for these 2 million is the same, it still allows us to increase our revenues and that is why we continue to invest into growing our audience.

Got it. And then also just one more on entertainment. How many cities do you offer entertainment in? How many cities would you sell? In New York, you would sell a Broadway show, but are you offering that in Europe as well?

In the US, we actually do offer it in all US cities. We, of course, are stronger in some cities than in others. But Europe, Chris, do you want to comment?

Actually we have a team based in London who are building out that business. It is predominantly UK-based. That does include London, Edinburgh, Manchester, even Belfast. And one of the greatest successes we had in the first quarter was, in fact, in the Manchester area. I think we had over 4000 tickets sold for Cirque du Soleil. We are also running it in Germany and France and Spain, but not to such a great extent. That is something, of course, we will do over time.

Great quarter, guys. Keep it up.

And sir, I am showing no further questions in the queue.

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 line at this time. Have a nice day.