Travelzoo (TZOO) 2011 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Travelzoo third quarter 2011 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 for joining us today for Travelzoo's third quarter 2011 financial results conference call. I'm Chris Loughlin, Chief Executive Officer. With me today is Glen Ceremony, the Company's Chief Financial Officer. Glen will walk you through today's format.

Thank you, Chris, and good morning, everyone. Before we begin our presentation, we would like to remind you that all statements made during this conference call and presented in our slides 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 early 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 today's format, I will review our third quarter 2011 financial results and then Chris will provide an update on our strategy. Thereafter, we will conclude with a question-and-answer session.

Now, if you will please open our management presentation, which is available at www.Travelzoo.com/earnings.

Turning to slide 5, this slide provides you the key financial highlights for the quarter. We achieved record revenues of $38.7 million this quarter, which is up 40% from the same period last year. This represents our fastest year-over-year revenue growth rate in 5 years. We also achieved earnings per share of $0.36, which is up 62% from $0.22 for the same period last year.

In addition, we continued solid growth in new subscribers, adding approximately 600,000 new subscribers.

On slide 6, we look at revenue by segment. Revenue growth in North America was 32%, our highest quarterly growth rate in 5 years. In Europe, revenue growth was 65% year-over-year, and in local currency terms we increased by 59%. We are encouraged by this continued acceleration of revenues in each segment.

Slide 7 provides more detail on our operating income. Operating income for the Company this quarter was $9.2 million. $7.8 million came from our North America business, while Europe contributed record profits of $1.4 million, reaching over a year of profitability. Operating income increased by over 60% despite a slowdown in Local Deals in August and continued prudent investments in Local Deals.

Our income tax expense was $3.3 million, resulting in net income of $5.9 million.

Slide 8 illustrates the change in the structure of our cost of revenue resulting from the growing significance of our Local Deals format. On the left is a chart displaying the makeup of our cost of revenue. Starting from the left bar is our cost of revenue from last year, which was before we had any significant Local Deals volume. Working to the right, you see the addition of costs that represent some of the components needed to run Local Deals. These include subscriber refunds, customer service and credit card processing.

One change unique to this quarter is that we began recognizing the merchant portion of the credit card fees' growth, rather than netting against revenue as in prior quarters. As you can see in the chart to the right, despite these structural changes that have impacted cost of revenues, our overall operating margins increased this quarter even while we continue to invest in Local Deals during a seasonally slower third quarter.

This is probably a good time to pause and reflect on the overall impact that Local Deals has had on our business since we started it 12 months ago. In addition to the revenue growth, one indicator of the impact would be looking at our operating margins over time. If you calculate our 12-month trailing average operating margin ending at our third quarter a year ago and you compare it to the same trailing average ended this quarter excluding the Q1 Delaware settlement, you see that the average margin is going from 19% to 24%. That's a 5-percentage-point improvement in operating margin. This is why we are investing over the last 12 months in the Local Deals opportunity.

This demonstrates that we're delivering on our long-term goals to balance our top- and bottom-line growth.

Okay, moving on to the rest of our expense place, let's turn to slide 9. This gives us more insight into operating expenses. North America and Europe operating expenses increased due to our investments in Local Deals. Yet, despite these investments, operating expenses as a percentage of revenue decreased for both North America and Europe.

Slide 10 shows that our headcount increased from 343 last quarter to 357 this quarter. We tempered our rate of hiring due to our focus on the productivity of our existing headcount after a period of rapid headcount growth. We also cautiously hired this quarter, given historically slower growth in our second half of the year. We do plan to continue hiring and focusing on productivity in order to invest in opportunity for future growth. As we grow Local Deals, we want to improve both the top and bottom line, so this will require continued vigilance.

Turning to slide 11, we take a look at our cash management. Our DSOs, or days sales outstanding, decreased to 34 days in the third quarter compared to 40 days in the second quarter and improved by 15 days when compared to the third quarter of 2010. We ended the quarter with $32.4 million in cash and cash equivalents. This was down from prior quarter as a result of our announced repurchase of our common stock, which was completed this quarter, amounting to $15.1 million. We generated cash flows from our operating activities of $9.1 million, which helped to offset the impact of the repurchases.

On slide 12 we summarize the financial results for the quarter. We achieved record revenues with the fastest year-over-year growth rate in 5 years. We continued to deliver solid subscriber growth and we had record total operating income and record European profitability, translating into strong earnings per share growth. We believe these results demonstrate our focus on growth and profitability.

Well, that completes the financial part of our presentation. So now Chris will cover highlights regarding Travelzoo's growth strategy.

Thank you, Glen. Turning to slide 14, we summarize the growth strategy which we continued to execute against. Along the X axis we are growing the number of subscribers who engage with the Travelzoo brand. We continuously attract new subscribers through word-of-mouth and through advertising. We are also reaching new subscribers through new media, such as the new iPhone app or the Travelzoo network.

Along the Y axis we're also growing our revenue per subscriber, and Local Deals has become a substantial driver of revenue per subscriber growth. As we turn on new markets, become more productive in existing markets and extend our product into getaways, we see significant incremental revenue per subscriber gains.

Other important drivers of revenue per subscriber along the Y axis include weight increases when our subscriber levels reach certain milestones in particular markets; our search-related products; and, of course, sales team optimization.

Turning to slide 15, you can see that we have now reached 21.3 million subscribers in Europe and North America. In Q3 we added approximately 600,000 new subscribers. This is solid growth for a seasonally slower quarter. We are excited to see that we are attracting new subscribers as we introduce new content types. For example, one-third of customers buying Local Deals were not subscribers before.

Slide 16 highlights the Local Deals opportunity. If we start at the top of the chart, we can see we launched Local Deals only a year ago, and we generated $800,000 in gross revenue. This quarter we generated $34 million in gross revenue. As a reminder, this gross revenue is the amount paid to us by customers for the vouchers. We present our revenues and income in the income statement on a net basis, which is gross revenues less the share we pay to merchants and certain reserves.

In Q3, our goal was primarily to drive productivity in existing large markets like Chicago, Miami and London, and launch in new attractive markets, especially large international cities like Toronto and Frankfurt, and to roll out getaways across the world. By the end of Q3, we were offering Local Deals in 96 markets and publishing getaways in all six countries. You can see that our average deals published per week increased to one. So while we are making progress, we're still some way off our goal of publishing two high-quality deals per week. This is largely because newer markets still have relatively underdeveloped sales activity. As sales managers spend more time in market, we get more case studies and more of a reputation; we're driving productivity gains.

Gross revenue per deal decreased to $25,000 as we published a larger percentage of deals in smaller markets and we reran a number of deals in a nationwide fall sale. Local Deals is now annualizing at more than $135 million in gross revenue.

If we look below, we can see the opportunity ahead. And this hasn't changed very much. Assuming we penetrate 150 markets and consistently publish two high-quality deals per week at $25,000 per deal, we could generate $360 million in gross revenues. If we fast forward to 200 markets and we assume revenue per deal of $37,500 based on an audience increase of approximately 50%, we see a business that could generate $780 million in gross revenues.

For Travelzoo, the pace of market launches and productivity in each market is restricted only by talent. If we on-board and train talented individuals who can call on high-quality businesses, we are able to scale a market relatively quickly.

Moving to slide 17, I would like to stress that our strategy really is focused on quality leadership. We believe that over the long run our subscribers will remain engaged and we will continue to attract new, high-quality subscribers if we deliver outstanding high-quality deals. Our belief is content defines the audience; it's not the other way around. And because we publish high-quality content, we attract high-quality audience.

For example, in Local Deals we publish offers at award-winning shows, like Lion King and Billy Elliot and Michelin star restaurants like Gordon Ramsay and luxury spas such as those inside the Four Seasons and the Ritz-Carlton. With Getaways, we're publishing deals at hotels and resorts listed among Travel and Leisure's World's Best 500 Hotels and Resorts, and the Condé Nast Gold List. And with the new iPhone app, we have already received a 5-star rating in the App Store and we were recognized last week as The Guardian's Consumer App of the Week. Actually, just yesterday, we were also picked up in Travel and Leisure as an app that you must have.

On slide 18, I want to remind you that Travelzoo subscribers are true travel enthusiasts. To the left, you can see a deal that we published at the Hudson Hotel in New York, and on the right you can see who purchased it. This might be quite a surprise to some of you. While a very large number of our Local Deals are purchased by locals who live in and around New York, they are also purchased by people who might travel. And that's possible because these are high-quality deals. If that was just a fish and chips shop around the corner, of course it wouldn't be attractive for tourists to book.

On slide 19, you can see that it's not just a domestic US phenomenon. We are really producing global content. On the left, you can see a purchase map for a Hawaiian spa deal and subscribers in Canada, the UK, Alaska, Australia, Japan booked that deal. On the right, I highlight a Paris hotel. We sourced that deal from our Paris team and published it in six markets worldwide, generating $300,000 in gross revenue for that hotel.

We are able to produce such high-quality content because we have established a high quality, affluent, travel-ready audience which is extremely desirable for these high-quality travel and local businesses.

To conclude, slide 20 summarizes management's focus for the remainder of 2011 and into 2012. We will continue to aggressively scale Local Deals in North America and Europe while keeping our eyes squarely focused on quality and productivity. We will continue to grow our subscriber base, especially in Europe. As we scale, we want to improve efficiency and operating margins. We will continue to leverage our global opportunity with content and further improve earnings per share.

As a reminder, Travelzoo's consistent practice is not to provide guidance for future periods because of the dynamics of the industry. This concludes our prepared presentation, and I will turn back to the operator now for the question-and-answer session.

(Operator instructions) Eric Martinuzzi, Craig-Hallum.

Thanks for taking my question, and congratulations on the strong growth. I'm wondering about this issue -- and it's my word, it's not yours -- but cannibalization between the two sides of the business. We don't get a -- you have done a nice job there in slide 16 talking about the growth rate and the quarterly gross revenue. But just if I use my own roughly 35% conversion ratio on the vouchers, I see the good growth on the local side, but I also see a little bit coming out of the travel side.

Could you talk about, is there a -- have you seen a change in that hand-off? Specifically, I would think Getaways would be a big impact. Have you seen more of that coming out of travel and into local from your advertisers' budgets?

Thanks very much for your question. So let me answer a little bit more on what's happening in the organization, then I'll ask Glen here to comment because we're obviously tracking that quite closely.

So, look, first of all, we are really thinking about that as a shift rather than a cannibalization. And it's important to make the distinction because a shift -- it's really a very positive thing. Shirley Tafoya's team -- and she is the President of North America -- is controlling Getaways 100%. These are the folks who are always selling media to hotels in the past, and now we take a decision -- do we offer this property as a Getaway, or do we offer it as a hotel and straightforward advertising? And in some cases, you might get property that would be more appropriate for a Getaway. What would make that more appropriate is its availability period might be for a longer stint rather than trying to target specific dates. It could also be that the property has a luxury spa and a restaurant that we'd like to include, which normally wouldn't have been included in the media side.

So it's an intentional shift. It's from the same team, and actually, if you look at the business holistically, it's paying off and it's a smart strategy.

Glen, would you like to comment any more on that from what you are seeing on the number side?

Yes, I think there are a lot of moving parts, Eric. If you just take that voucher business and back into it, you're kind of missing some of that. Right? So I would say, like Chris said, it's another product that they have to offer to solve whatever the advertisers trying to solve for. And we are making a trade-off and it's actually working out. Right?

Don't forget; we also have the search products in there. That's probably a tough comp from last quarter on that. And then I think maybe one theme that -- this year airlines have consolidated, as you guys know. So that has some impact, not a dramatic impact, but that definitely has some impact on our business year-over-year.

Okay. And then one other thing that caught my eye in the slide deck, and I'm referring to slide 10 here where you talk about your number of employees you have, there was actually a sequential decline in your North American headcount between Q2 and Q3. I know you're trying to drive both growth and profitability, but I would think, given the opportunity that you've laid out, especially in the Local Deals business, that you would be adding people in all geographies. Can you address that?

Yes, sure. We are adding people. And if you look at the pace at which we added people at the beginning of the year, it was very aggressive. And sometimes it doesn't work out with some individuals, and for one reason or another you move on. So we really, in Q3, were focused on working with the folks who had come into the business and really getting those folks productive. And I think you're starting to see that come through. We weren't really in a major hiring mode in that quarter.

And we know, for example, in Europe, Q4 is the slowest quarter of the year. So to be now hiring aggressively before Q4 might not be as prudent. I think, rather, you want to be bringing the people in so they can start to operate at the beginning of the year.

Glenn, do you have any further comments on that?

Yes, honestly, when we are looking at productivity as well, like we talked about last quarter, we are looking at who is producing and not producing and then adding. And if someone is not producing, that wouldn't last as well. So it's kind of balancing those two factors. So I wouldn't take it --

Any element of like voluntary attrition due to the competitive nature of this market?

No, not that we've seen, no. I think it's just -- it's us focusing on making sure everyone is productive and then cautiously adding the right talent. And so that slight decrease of a couple heads -- that's the overall business, too. So that's not necessarily (multiple speakers).

Yes, and I would really like to point out here, Eric, anyone can get go and get a deal at the -- I mentioned on the call -- a fish and chips shop. But if you want to go and get a deal at Gordon Ramsay, Marco Pierre White, the Four Seasons, you really have to have sophisticated individuals who can talk intelligently to these businesses. We are not a shop of tens of thousands of people calling in and getting any old deal. We really are focused on quality.

So you can find out by interviewing people and putting them through assessment centers, whether an individual has got it or not. But really you don't know until one or two months in whether they've got it or not. The good news is that we have a phenomenal team here. And I think, as this industry starts to evolve, you see the DNA that Travelzoo has got when it comes to quality deals publishing. We have been doing this for 10 years. We know what we're doing, and I'm really excited about the talent we are now seeing coming in through the door.

Okay, thank you.

Jason Helfstein, Oppenheimer & Co.

Two questions -- one, Chris, can you just give us -- I know you don't give guidance, but maybe just a general outlook for the sector based on your discussion with vendors. And then, secondly, it's interesting (inaudible) with Groupon's pending, it seems, IPO, there's just more and more thought about the value of deals and to different kinds of businesses that were different things. How important is it for the provider of the deal to help curate that versus just to let the deal happen? There's plenty of examples where the deals didn't work for the vendor because they weren't done right or they offered too many.

And I am just wondering, to the extent that you tend to curate your deals much more as opposed to kind of just taking anybody who walks in the door and saying let's just sell as many as we can, that ultimately provides more value. And if you think you've seen some benefit from other vendors becoming disgruntled with the Groupons, and particularly, just specifically to restaurants, we're seeing much less restaurants with Groupons, and how that is benefiting you. Thanks.

So that outlook on the sector -- look, I think this is obviously -- it's an early stage. It's a very early stage for this industry. It's going well, from what we see, very well and it's a natural extension of what we are already doing. Travelzoo was publishing restaurant deals 4 or 5 years ago, but we would put them through the likes of, I don't know, Top Table in the UK or (multiple speakers) --

I don't mean to cut you off, but your outlook for the travel, specifically, so not for the deal side.

I'm sorry, okay, I'll look for the travel. Yes, okay, so let's see what happens with oil now that Libya seems to be coming back (inaudible) we've got the Libya situation as the oil looks like it might remain relatively stable. You've got the dollar influencing that, so I think it's going to be relatively high-priced airline seats, consolidation on the hotel side. I think you're going to see more occupancy, which is good for Travelzoo. So there will be more deals.

I don't have visibility really beyond the end of the year. You could start to see the Europeans sort out their problems, maybe we are in a different situation next spring. But overall, I don't see that it's going to get much better, and I think maybe even in Q2-Q3 next year, there will be a lot of occupancy, which certainly means deals for us.

On the second point about the types of deals, we are very selective about the companies we work with. And we've done that -- we've worked really hard to build this audience up. Think about -- Travelzoo publishes Cruise deals. What type of customer goes on a cruise? And that sort of gives you the demographic makeup of the Travelzoo subscriber. So we are not dealing, necessarily, with younger folks who are just coming out of college and so forth. We are dealing with people who are affluent, sophisticated travelers. 87% have got passports, and they have higher expectations.

So when our customers walk into restaurants and spas, generally the feedback we get is that the restaurant is very happy. Most of the restaurants that we've worked with want to work with us again. And, yes, we do sit down and think about how can the restaurant make money. And if you look last quarter, we were selected by [Cisco Eye Care] to be their partner. And they will now walk into restaurants and say, if you are going to do a local deal, work with Travelzoo because of the audience and because they think about how you can make money. And that's going well.

So we could run more deals, many, many more deals; but we don't. I think the other thing is -- (inaudible) said in the presentation -- we are publishing right now one deal a week. So while we could publish seven deals a weak, but we are being much more selective in just publishing that one. And we believe we get results from that.

I can't really comment on the other companies. Some of them are doing a good job and some aren't doing such a good job as far as quality goes.

Thanks.

Naved Khan, Jefferies & Company.

So, Chris, can you talk about the performance of the Getaways product during the quarter?

Yes, the Getaways product is a flying success. It's being managed by an awesome team, and we had in Q2 a little bit of confusion as we introduced the product, defining the product, what is it. It's high-quality hotels with outstanding restaurants and spas, and it's going firmly well. We published -- I'm actually set in London right now, and the team here were very excited. Two days ago they published a Conde Nast Gold List Hotel in Ireland, and I think it sold 1000 vouchers within 24 hours. So it's a hot product, it's going well and we are still rolling it out.

Can you tell us how many markets you have rolled out in Getaways?

No, I don't, because they're destinations. I can come back to you and let you know how many Getaways we ran, but we don't think of it like that.

And then, also in the (inaudible) I think Groupon launched a getaways product with Expedia, and I think Priceline is also out with its own product. Are you seeing any kind of impact from that, or is it too early?

No, look, a rising tide lifts all boats; right? There are some companies out there that are also doing it beyond the ones you mentioned. And what we see is, because we focus on a certain segment we have a high quality, higher end, slightly older demographic. We are able to work with properties that are steering towards the five-star bracket, and it's not -- we are not seeing any negative impact to the other people who are in the industry.

The one thing you got to remember about this whole business -- there are still only 365 days of the year. And that means it doesn't matter whether you are a Groupon, LivingSocial, Travelzoo, everyone can only send one e-mail to a subscriber today. So there's really -- there's a natural limitation on the consumer end, and there are tens and hundreds of thousands of properties that each of these different companies could work with. So we are certainly not seeing any impact from competition there.

Okay. You also mentioned in your prepared remarks that roughly one-third of the deals have been bought by new subscribers. So wouldn't it make sense for you to go out and acquire new subscribers more aggressively?

Well, I mean, yes. You can drive the entire business to a loss-making situation, and you could spend gazillions on marketing if you want. We, rather, decide to manage the business prudently and as we see productivity per person in our business coming up and overall productivity improving, then that would mean that we have more content, which means that we would go ahead and push out for more subscribers. In some cases, it doesn't help you if you've got more subscribers because a spa might only have 4 beds. So if I add another million subscribers, it doesn't help me because I've already sold a spa out with 1000 vouchers.

So we have over 21 million subscribers right now. We are not addressing all of them, and we've got a sales force coming in to help address them. I think probably the better bet right now is let's get that sales force moving and address the existing subscribers, and then we will start to speed up on subscriber acquisition again.

And the last question from me -- so, based on what you said earlier, is it fair to assume then that in the core publishing business, your revenues were down low-single digits year on year?

I'm sorry. Glen will answer that question. I'm not quite sure what the question was. Maybe you could repeat it for Glen.

Yes, could you repeat the question?

Yes. So based on, I think, what was said earlier on the call, is it fair to assume that in the core publishing business, revenues were down low-single digits year on year? (Multiple speakers) (inaudible) back into the core versus the local businesses, and how the revenue trends are.

There's a few things going on in there. So don't forget our search products. They're part of our entire business and kind of commingled with everything. But I can say that it was a bit of a tough comp compared to last year from a growth rate perspective.

But yes, the impact is twofold to that growth rate that you are probably backing into. And that would be some of the airline consolidation this quarter, and then just the shift. So we think, when you zoom back out and you see our operating margin going up and we are in a new business and we are investing in that, that that's -- we are seeing the day-to-day trade-offs that we are making that make sense on the Getaway trade-off.

And we really -- maybe the analyst community likes to think of them as two separate businesses, but this is one business as far as we're concerned. And I think it's really important to know that, you know. Shirley Tafoya's team, which she would call in a classical call, they are running Getaways. And Stephen Dunk's team, who is in what you would also call the classical core -- they're running Getaways. So it's really important to understand that we are very happy with this, with what we are doing here. It's not that we are concerned about it. Of course, we can always do better. We want to do better and I'm certain that we will. But it's intentional and it's positive.

Thanks, that's helpful, and congrats on the quarter.

Ed Woo, Wedbush Securities.

Yes, good growth, guys. I wanted to touch back on the outlook for the travel sector. Did you say that you haven't really seen any impact, either in the US or in Europe from some of the economic news that we saw over the summer? And also, was there any impact on FX and -- now that the euro has weakened significantly over the past couple of months?

On the first point, Ed, no, I didn't comment on what we've seen since the summer. I think I was responding to what the outlook looks like from here on. So would you like me to talk about what I saw from the summer, or would you like me to -- (multiple speakers) at that point I wasn't --

Sure. Yes. We've got a lot of news out of Europe that there's risk on the economy. We obviously had -- the euro weakened significantly. I was wondering, do you see any of the impact on your European business as well as possible impact on the much weaker euro on your financials?

Well, what's interesting about this summer -- I did a road trip around Europe this summer. I can tell you, Germany was absolutely on fire. The economy is booming. In the summer, it seems to have slowed down a little bit more recently, but it's still hot.

Interestingly, Paris -- I met with Paris hoteliers, and they told me they had one of the best summers they've had in 5 years. So whether that continues I don't know. Of course, for our business it would be problematic now if the euro and the pound really lost value because we report in US dollars, and I think that I would be concerned. It seems in the last week or so it has stabilized. But there was a point a month ago where I was concerned that we might see a continued devaluation of those currencies. So I think that that's something to think about. At the moment, it seems we're sitting around 1.30 and 1.57 against the pound -- I'd say, against the dollar, but that obviously has an impact.

The one benefit, of course, is if that does happen, it means that we could invest in Europe because we're holding in US dollars and actually it becomes slightly beneficial there.

In previous calls you have talked about the profitability by country. I know that you had a very good quarter overall in Europe. Would you say that it was pretty much across the board in all regions?

Well, yes. We haven't really broken it down in this presentation, but the UK is the driving engine of our European business. Germany is another large market, and France and Spain are still in development. And that has been relatively consistent on message for the last year or so.

Great. And then, the other question I have is, have you noticed any change in commission rates on Local Deals, either on an overall basis because of different product mix or within specific categories, such as restaurant takes or spa takes?

We haven't seen any significant changes, Ed. Obviously, within hospitality we are trading at a different level to the more local areas, so the Getaways trade at a different level. But in the restaurant/spa area, we haven't seen any significant changes.

Okay, thank you and good luck.

Justin Patterson, Morgan Keegan.

First, if I just look at the number of sort of gross revenues this period as well as the numbers you just disclosed for the July and August period, it looked like you had quite a bit of an acceleration in September. I just wondered what the factor behind that was.

The acceleration in September was really a case where the merchants -- if you walked around the city in New York in kind of the early summer, the restaurants were packed. Then restaurants weren't packed towards the end of the quarter. The other thing is, you had July 4th weekend, the beginning. Of course, that caused a bit of a slowdown, and then we saw a pickup towards the end.

The guys put in -- I think they put in a promotion as well, a sales incentive. And that also created some emphasis to get moving. But it was largely the fact that the nice restaurants were full, and then they weren't.

Got it. And then, Chris, earlier you had made a comment about the market being constrained by 365 days of the year. Yet, if we look at what your competitors -- LivingSocial, Groupon and some of the others -- are doing, there are now instant deals that provide, I guess, real-time deals that are very time sensitive. So in that case, you are still date-constrained, but you actually have multiple, more deals hitting per day. How do you feel about sticking with your one deal per week or two deals per week strategy [daily] over time in this case?

Well, if you look at our average gross revenue per deal and you compare it to some of the others in the space, we are off the charts. Right? So it seems that even though they might produce more deals per week, we generate more revenue per deal on average. So less is more, in that case.

With respect to instant deals, many of our deals are instant. We actually had a nice e-mail from a subscriber. He was in Orlando. He checked out of one hotel, then he checked in with another and then he went to a restaurant and so forth, and he did it all using our new iPhone app. So we are already in that game.

The interesting thing around instant or the idea that you can publish thousands and thousands of deals is, well, how many of those -- how many vouchers could you really sell? If you don't get that out in front of a large audience, how many could you really sell? And I think the volumes are going to be relatively low.

So yes, if you don't require the same level of sales and production activity to curate those instant deals, it is rather more self servicing, it might be quite -- be quite interesting. But, otherwise, the volumes would be relatively small. And you have to think about push media versus pull media, and they are very different. And all of the companies that operate in this space right now are stimulating demand and pushing, and that's what is creating the volume. And you need volume in order to drive profitability in this game.

So (multiple speakers) I think it's interesting. It's interesting. Of course, we are looking at it. But we always like to look at businesses, and we like to build profitable businesses rather than cool ideas.

Right, and on your comment about gross revenue per deal is generally higher. But if I look at the trend, it has been declining pretty meaningfully on a sequential basis as you go into more and more markets. So there is some offset as you get frequency up in place.

So now that frequency is at one deal per week across 96 markets, I guess I'm just kind of confused as to how you expect gross revenue per deal to stay at about $25,000 per deal, as you look to get up to 150 or even 200 markets.

Well, I don't think we're publishing nearly as many Getaways as we could publish, and that, of course, contributes to the gross revenue per deal. We have some -- I may have shown one hotel deal in Paris that was actually on a direct basis, but that generated $300,000. That brings your average back up. We are also not very active in some of these larger markets yet; Boston is a market that we still have to get our hands around. We weren't terribly focused on Chicago. Of course, the gross revenue might fluctuate higher or lower, but I can definitely see a clear path to being at that level.

Got it. And you're not concerned about Groupon or some of the others in this space? Groupon does have 115 million subs at this point, and there's more than just fish-and-chip deals. If I look at the Groupon Getaways site, those are all very top-tier properties, and even on the spa and restaurant packages they have in place. So I'm kind of curious how the merchant discussion (multiple speakers) --

No; I wasn't insinuating that Groupon has fish-and-chip deals. I'm just pointing out that we don't have fish-and-chip deals.

When you go to the newsstand, there are 100 magazines on the newsstand, and to the far-right hand you've got The Economist, Vogue and Condé Nast Traveler. To the far-left end, you've got other publications. We want to be The Economist, Vogue, Condé Nast Traveler. That's where we are headed, and there's plenty of room for plenty of other magazines on the stand. And in the long run, people will select a high-quality publication that fits their personality and their needs, and they may, indeed, buy one or two magazines off the shelf. And that's fine by us, too.

The biggest threat to our business, I think, is ourselves. If we don't maintain our quality standards and even sharpen and get better, then that's where we will fall down. But just because a competitor does a good job too doesn't mean that we have become irrelevant, somehow.

Got it, thanks (multiple speakers).

Frederick Moran, Benchmark.

Good morning, Chris and Glen. If you don't mind, could we go over the chart on figure 8 that talks about the gross profit margin? And just help us understand why -- is it some kind of a reclassification as noted under the chart, or is it a meaningful uptick in subscriber refunds and credit card processing that hurt gross profit margins? And maybe explain why exactly subscriber refunds happen.

And then, secondly, the marketing budget seemed a bit lower than I would have expected. Is that all a normalization post the second quarter advertising campaign, or is it more/less headcount growth? How do we look at sales and marketing on a normalized basis?

Thank you, Fred. I'll let Glen take this question.

First, your question on subscriber refund. So we do have those, for various reasons. Right? And the prior periods have been reclassed to conform. We had those certain subscriber refund in the sales and marketing line. We are just making sure that's visible. It's a direct impact of that portion of our business. Right?

And regarding your uptick question, I would have to say there was this quarter a bit of an uptick on that. Just, I think, on the subscriber refunds, we have a refund policy, right, that is fairly short. But if there's significant issues with a merchant, like if there's a merchant that goes out of business or something like that, right, then we are going to stand behind our subscribers. We are not going to let them really be damaged for a severe situation. We had a couple of merchants in that class this quarter that we felt that we needed to take care of. So it's a combination of both, but it should be conformed there for you.

What about the uptick in the credit card processing? Why did that occur?

Because we sold more.

Most of that is volume, but I would say there's -- oh, so the other point is the gross-up, right? So the merchant portion of the credit card fees used to be netted against revenue in prior periods, and now it's reflected growth here.

Okay, that's a great clarification, thank you. On the sales expense, was it the second quarter advertising campaign disappeared, accounted for the entire drop in sales expense, or was there anything else going on? And should we use this third quarter as kind of a quarterly base rate for sales expense?

Yes, that's the biggest drop. I would say going into the second half of the year, we were cautious on that spend. So I would say from a perspective of the second half of the year, you might want to look at it as normal. But when you are looking at a sequential basis now, there was some more reduction of spend in addition to the TV spend that you referred to.

Okay. And then for Chris, it seems there's a pattern emerging of a lot of deals near the end of the quarter or the end of the month. You touched upon a little bit of the seasonality that happened this last quarter. Can you -- is there any effort made by the sales force, perhaps, to push a lot at the end of the quarter? And is there any way to avoid what seems like an early quarter or early month slowdown that seems to recur?

What I would say is yes, of course. That comes through tighter management. Also, as teams become more productive, that business is still a year old, which means half the people have only been there for six months and a quarter of the people have only been there for three months. So that hopefully comes with time, and it's something that we continue to work on. But I think the guys are doing a tremendous job and they are growing the business. It's now one year old. It's really important to remember that; that business is one year old. Most people seem to think it's been around for a very long time. So I'm very pleased with what they're doing. And yes, it's going to become more mature in the next 2 to 3 years.

Okay. And then on the number of markets, when do you think you'll actually have enough time to determine a meaningful history with middle-market activity to determine whether it's -- it warrants going into 150 to 200 markets total? And when we see certain middle markets active for a while and then they disappear off the site, why does that happen? And should we expect they will come back at some point?

Well, there's two reasons why that happens. In one case it might be that we find a salesperson who is able to develop a market. We did that in Des Moines last year, and we moved a person down to Los Angeles, and that was a great decision.

The second is we have been publishing entertainment content for a very long time, I think since 2006 or 2007. So what we did when we launched Local Deals is we decided not to publish entertainment in our Newsflash product, but rather publish it in our Local Deals product. So you see those deals come out and you will see that they are direct purchase deals. But we would have been publishing those deals in Newsflash anyway, so you will see a city come up on the site, but that doesn't mean that we've got any Local Deals sales coverage.

And you might see that there is there's another restaurant deal, so spa deals and more Cirque du Soleil going into Edmonton, Canada or something like that. That's all being controlled from a central location.

So those are the two reasons why it happens. And as we bring on more people, we'll obviously allocate them to the most productive markets.

So how much history do you need in the market -- 3 months, 6 months -- to determine whether you will keep that market open? I'm just trying to get a general sense -- should we expect that half a year from now, we will know whether 150 markets warrant being active in?

Yes, I don't really know. It could be a very short period of time; it could be a very long time. It really depends on how talented the individual is and how stable the team can become. But essentially, you think about those regions and these countries -- it's not like we're just starting one business and that's it. We have really started six different countries, and within a market like United States, you are starting almost four different businesses, given the regional territory split.

So I think it was rather fluid -- maybe, for the next year or so, it's fluid. But as you can see from the results, we are focused on maximizing our opportunity. And I really couldn't put a point on it and say this is the answer, just that we are focusing on maximum productivity.

And you know, we have started tons of businesses. I started the UK business; this is nothing new. It takes you probably 2 to 3 years to really get that groove where you could have very simple, predictable answers. But when you're starting a business, it's quite different. And we're making tremendous progress. A market like Los Angeles is very stable now, and you know, could I have predicted that Los Angeles would be more stable than Chicago a year down the line? No, I couldn't. But it is, and I know why now.

Thanks, Chris, I appreciate it.

Okay, I'll turn back now to Mr. Loughlin.

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

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