Travelzoo (TZOO) 2010 Q2 法說會逐字稿

Good morning everyone, and welcome to the Travelzoo's Second Quarter 2010 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, Chris Loughlin -- 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 Second Quarter 2010 Financial Results Conference Call. I'm Chris Loughlin, Chief Executive Officer.

With me today is Wayne Lee, the Company's Chief Financial Officer.

Good morning, everyone. Welcome to our conference call.

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 could cause actual results to differ materially from those in the forward-looking statements are described in our Forms 10K and 10Q 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, Chris will review management's prepared presentation, and we will then conclude with a question-and-answer session. If you will now please open our management presentation, which is available at www.TravelZoo.com/earnings, I will now turn the call over to Chris.

Thank you, Wayne.

Our presentation will fall into two parts, today. First, I'll talk about our financial performance, and second I'll provide an update on our growth strategy.

So let's turn to Slide 4. I'd like to highlight our key performance metrics for Q2 2010. We're quite pleased that our revenues grew by 19% to $28.1 million. Our earnings-per-share doubled from $0.10 to $0.20. Subscribers grew to 18.3 million.

The next slide provides more detail on our operating income. Operating income for the Company in Q2 2010 was $5.9 million. That consists of operating income of $6.7 million in North America, and an operating loss in Europe of $800,000.

Our income tax expense was $2.7 million, resulting in our net income from continuing operations of $3.2 million. Our effective tax rate in Q2 2010 was 46%. As you can see in the chart here, these are all significant improvements on Q2 2009.

Turning to Slide 6, we see our revenues by segment. Revenues in North America grew by 12% year-on-year, maintaining a growth rate that was seen in previous quarters. In Europe, revenues increased 49% year-on-year, and in local currency terms, they increased 55%.

In Q2 2010, we experienced a series of macro events that affected our performance in Europe, including the ash cloud, airline strikes, proposed postponed travel demand due to the World Cup and the Greek crisis. These events hampered our advertiser competence.

On Slide 7, you can see that our operating income increased year-over-year from $3.4 million to $5.9 million, despite an increase in salaries and employees' expenses due primarily to higher headcount and greater investment inside of our marketing.

Slides 8 and 9 give us more insight into our operating expenses. First, here on Slide 8, we can see that operating expenses in North America increased slightly compared to Q2 2009. However, because our revenues increased by 12%, operating expenses decreased as a percentage of revenue; from 71% to 64%.

On Slide 9, we can see that European operating expenses increased by $1.5 million. This is due to increased spending on subscriber acquisition and marketing of Fly.com. However, as a percentage of revenue, operating expenses decreased from 125% to 110%.

Moving on to Slide 10, this shows that headcount increased from 201 in Q1 2010 to 208 in this quarter. And revenues-per-employ decreased from $542,000 but remained stable versus Q2 of 2009.

On Slide 11, we focus on audience growth. On the left-hand side here, you can see our annual audience growth since 2007. From the end of 2007 to the end of 2008, we grew by 9%. From the end of 2008 to the end of 2009, we grew by 24%. And since the beginning of this year, we've already grown the audience by 9%.

To the right-hand side, you can see that in Q2, we added 1.1 million new subscribers, but we also unsubscribed 600,000 subscribers. So we have a net increase here of 500,000.

Finally, Page 12 takes a look at our cash-management. DSOs -- days sales outstanding -- increased slightly to 45 days, compared to Q1 2010. And we ended the quarter with $31.9 million in cash and cash equivalents.

Let's now move on to the second part of the presentation and look at our growth strategy.

On Slide 14, you can see that we have three growth pillars. First, we want to multiply the Travelzoo business in attractive international markets. We've now whirled the Travelzoo business model into Canada, the UK, Germany, France and Spain. In two of those markets -- Canada and the UK -- we have been profitable for three consecutive quarters, and revenues continue to grow.

As we scale into international markets, we also want to leverage our market position to create new exciting content for our existing subscribers. We believe this can lead to new advertising opportunities.

For example, in Q2 2010, we introduced Salvatore Ferragamo's estate in Tuscany to our 12 million subscribers in the US. We didn't just recommend the resort on a standalone basis; we helped the resort create a package offer with a tour operator in the New York area, including (inaudible) hotels.

Prior to our international expansion, this type of intercontinental advertising sales opportunity just did not exist in our business. Second, we are expanding our content and product offering into entertainment, including Broadway and West End shows like Disney's, "The Lion King," sports events such as Major League Baseball and Premiership Rugby, as well as concerts and attractions. By focusing on this content category, we're able to engage with our subscribers more frequently and at a very local level.

The third -- last year you see we launched Fly.com; a metasearch engine. We see great synergies between Fly.com and the Travelzoo publishing business. We also believe that in the long run, this is an opportunity with attractive economics on its own.

Let's now take a deeper look at the international expansion on Slide 15. While we continue our growth in North America, in Q2 2010 in the face of 14% year-on-year, we've been focused primarily on growing our audience very rapidly in Europe, at a rate of 50% year-on-year.

23% of our audience of the 18.3 million subscribers now resides in Europe, and that is indeed very exciting. Asia-Pacific, as most of you know, is now independently owned under license agreement. So worldwide, the Travelzoo brand now reaches 20 million subscribers.

On Slide 16, you can see that the international expansion comes at a cost. Looking at the first blue chart, you can see that excluding subscriber acquisition, operating income from North America and Europe would have been $0.54 per subscriber. Once we take out subscriber acquisitions and other expenses, we arrive at an operating income of $0.36. The blue bar with taxes at $0.17 per subscriber. So our resulting EPS is $0.20 per subscriber.

Slides 17 and 18 show that we continue to make good progress on our international expansion. Using the UK as an example here on Slide 17, you can see how over time the increase in subscribers drives increasing revenues, and how the revenue growth ultimately drives operating income.

The white bars are year-to-date numbers. It is really very exciting here to see that in the first half of 2010, excluding Fly.com, we've generated a profit of GBP 1 million in the UK. For me personally, I really am very proud of what we've achieved there, given that started that business just five years ago.

Our strategy of building subscribers, investing in the audience and generating revenues from them, and then ultimately turning to a profit is working in the UK; it's working in Canada.

On Slide 18, I'd like to show the progress we're also making in the other countries in which we operate. We're profitable there again you see in the UK and Canada. And as you can see here, we've got a very impressive operating margin in Canada now of 48%.

In the UK, we're at 20%. In Germany, France and Spain, we're still incurring losses. But you can see here that these are decreasing, so it's pretty good news.

You can see there are revenues in Q2 in France. When compared to the other countries, it's relatively low. In addition to the macro events I outlined earlier, we haven't really started focusing yet in France on hotel sales, relative to the other markets you see here. So we've got strong hotel sales in the UK and Germany and Canada, but not in France at this time. We are addressing this opportunity by hiring and training French advertising sales managers to focus primarily on the domestic opportunity.

From the last slide, I'd like to summarize again where management focuses. Our international expansion is proving very successful, and we would like to continue our growth in Europe. We'd like to achieve an overall profit in Europe within the next three quarters, and we think that's realistic.

We would like to monetize our larger audience in North America and increase efficiency and operating margin in our core business.

With 20 million subscribers now worldwide, we want to sell more aggressively to the global audience, and we are already producing more and more global content like the Salvatore Ferragamo deal that we published this quarter.

The expansion into entertainment on Fly.com will continue, adding further revenue per subscriber, and we believe greater subscriber engagement. And finally, as we have demonstrated over the past three quarters, we intend to continue improving 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 we will conclude our prepared discussion and I'll turn it back to the operator now for the question-and-answer session.

Thank you.

The floor is now open for questions. If you do have a question, please press *, followed by the 1 on your touchtone telephone at this time. Once again, if you have a question, ladies and gentlemen, that is * followed by the 1 digit on your touchtone telephone. Please hold while we poll for questions.

Thank you.

Our first question comes from Ed Woo from Wedbush. Your question please?

Yes. Welcome aboard and congratulations on the first quarter.

My question is, what's the overall outlook for Europe right now? I know you mentioned that you had obviously the Euro weakening, and issues of a few countries in Europe. What do you think the outlook is for the back half? And do you see the rapid acceleration of subscribers continuing for the next couple quarters?

Thank you, Ed. And thanks very much for your kind words. So what will happen there in Europe, the biggest impact we saw was indeed the World Cup. All four of those countries that we operate in were in the World Cup, and as soon as each country popped out the other side, then all of a sudden, everyone started focusing again on selling travel.

The ash cloud was disrupted. The British Airways sale was disruptive. And then the Greek crisis definitely has had an impact on the European psyche.

In the week after England came out of the World Cup, we had a record week in the UK Top 20. So that was positive. I would say that the situation --

I mean I can't predict whether there'll be another volcano erupting or any of these events, but certainly I can't imagine that there'll be as many disruptions in the third quarter as there were in the second. It was almost just one after the other.

With respect to building our audience, we see no reason why we should slow down our momentum in audience growth. We're adding at a fair clip in the UK. And you see there in the UK, we are indeed profitable. Though we can do it at a profit, as well. Not just at a loss.

Great!

And as an avid user of Fly.com, I was happy to see that you guys added multi-city functionality into that. I was wondering if you have any comments about what the status is on Fly.com and where you see it going in the next couple of quarters?

We're very pleased with Fly.com. In Q2, in North America, we had 4.9 million searches. Sorry -- that was we had 6.25 million searches. Up from 4.9 million searches in the prior year; so that's a 30% increase year-over-year. So we're very pleased with that.

You might've seen the TV advertising that we ran for Fly.com, so we experimented there. The great opportunity with Fly.com is further integration with the Travelzoo brand. We do have in North America 12 million subscribers. Worldwide, 20 million subscribers. The more of those subscribers we can introduce to Fly.com, the more traffic we can get.

The other thing Ed, you get over time with any business -- and we saw that in the UK and we're seeing it with Fly.com -- is as each quarter progresses, each year progresses, the efficiency and the monetization you can get from a product improves. We really do see that in every business. It's not a surprise, and we all learn that in business school, too. Most businesses take three years to really hit that inflection point. But we are making tremendous progress there, and we're very excited.

Well, congratulations and good luck.

Thank you very much.

Thank you. Once again, ladies and gentlemen, if you have a question at this time, please press *, then 1 on your touchtone telephone.

Our next question comes from the line of John Lewis from Osmium Partners. Your question, please.

First, welcome aboard, and nice quarter.

I guess first off, I noticed recently in July, you guys relaunched the US homepage for Travelzoo. I was just curious if you could give any comments on the effects of the site relaunch. It's probably the first time in 5 or 6 or 7 years.

Thanks, John. And thank you for your kind words.

Yes, the new site launch; it's been a work in progress for just under a year. And we got the US homepage and site live about a month ago.

The UK and Germany and the rest of the markets will go in the next few months, here. The primary reason was in fact with our advertisers, giving them a place to showcase their properties, their cruise ships, in maybe a slightly more appealing light. The old site functioned very well. It was very popular with our subscribers.

The new site seems to have been received very well by subscribers. But where you see the most positive comments coming is from the travel industry. The fact that now on the homepage you've got these large photos, and I can show you what it looks like inside Virgin America, that makes a big difference.

So that's where the positive response has been.

In respect to traffic, traffic remains relatively constant. There's no fundamental change to the usage on the site. So it was a good change, and I think internally everyone kind of feels positive about it, too.

As I say, the site looks great. And I was just curious; I guess the question was really in fact the economics of the business in terms of the ability to showcase more inventory or anything like that. But it sounds like it's really just improving the user experience right now.

Right now it's about improving the user experience. I mean you do see on the homepage that we've got a space dedicated to entertainment. We have built a very successful entertainment and local deals business up over the last three to four years. And so having the opportunity to show you those deals in a dedicated space will have obviously a positive impact, and does open up some inventory. But that wasn't the primary motivation. It was really about stepping up into the next phase of business.

John, we really think we've got a top, top brand here. A brand that our subscribers love; our advertisers respect. And we've got an opportunity like a Starbucks had maybe 15-20 years ago to build this global brand. And that website now represents our brand aspirations. I think the old site, while again it functioned very well and it did the job, and the information you got was absolutely correct, it didn't necessarily represent our brand aspirations.

That's great. I appreciate it, Chris. And good luck.

Thank you.

Thank you.

Our next question comes from the line of Noah Steinberg from G2 Investment Partners. Your question, please.

Hello?

Mr. Steinberg?

Hello?

I guess we can hear you.

Hi. I just had a question on media prices in Europe due to the World Cup and other events. Did you see any changes? It seems like you're able to keep down your sub-acquisition expense while at the same time increasing your subs pretty nicely.

Yes. If you look at Q2, it usually follows like this in Europe. Q1, certainly in January, you get very low media prices. Because consumer goods pull out, and travel companies are still gearing up. Q2, it starts to move up certainly for quality travel space, because you're moving closer to some holiday period. And then towards the back end of the year, consumer goods come in and prices go up.

So that has not changed. And if you look at those CPAs year-on-year, they're relatively consistent Q2 over Q2 in Europe.

Yes. Okay.

And the other question I had was regarding earnings-per-share. You've increased it nicely, sequentially over the last I think it's now four quarters. Can you continue increasing it over the course of the year?

Well, we would. I mean we said we have a stated goal there, right at the end of the presentation. That is a strong focus for management.

Our intention is to continue with this good progress, and of course we'll work hard towards that goal.

Great. A great quarter, guys.

Thank you very much, Noah.

Thank you.

I will now turn the program back to Mr. Loughlin.

Thank you ladies and gentlemen for joining us today. If there are no further questions, we will now end the conference call. And thanks again, and please feel free to contact me directly at the office here in New York, if you do have any further questions. Take care.

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