Travelzoo (TZOO) 2012 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Travelzoo second-quarter 2012 financial results conference call. At this time, all participants have been placed in a listen-only mode mode, and the floor will be open to 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 second-quarter 2012 financial results conference call. I'm Chris Loughlin, chief executive officer.

With me today is Glen Ceremony, the Company's Chief Financial Officer. Glenn 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 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 Form 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 call conclusion of this call.

For the format of today's call, I will review our second-quarter financial results, and then Chris will provide an update on our strategy. Thereafter, we will conclude with a question-and-answer session.

Now, please open our management presentation, which is available at www.travelzoo.com/earnings. Turning to slide four, this provides you the key financial highlights for the quarter. We achieved revenue of $39.4 million this quarter, which is slightly higher than prior quarter, despite an expected seasonally slower quarter, and up 5% year-over-year.

We achieved a record earnings per share of $0.45, which is up 53% from our $0.30 earnings per share for the same period last year. And we had growth in new subscribers, helping the Travelzoo brand reach our 25 million worldwide subscriber milestone this quarter. These results are a demonstration of our ability to operate a profitable company in a competitive landscape.

On slide 5, we look at revenue by segment. Revenue in North America is at $28.7 million, representing a year-over-year growth rate of 4%. In Europe, revenue growth was 7% year over year, which is lapping high growth from last year. In local currency, Europe revenue growth was 10% year over year.

We will provide some more insights on revenue in the next few slides. Turning to slide 6, as a reminder, we break out our revenue by type. First category revenue is travel. This includes the products our subscribers and advertisers have enjoyed over the years that present tested, high-quality deals, coming from primarily from our flagship products such as Top 20, Newsflash, Website and Network.

In addition, our travel revenue includes our Getaways voucher-based format. This aligns with the way we manage our Getaways offering, along with our existing hotel advertising products, included in travel.

The second category of revenue is Search. This includes both our search products, Fly.com and SuperSearch. We continue to believe these tools are great complement to our business, as both provide an easy way for our subscribers to comparison shop for airlines, hotels and car rentals.

The third category of our revenues is Local. This includes both Local Deals voucher-based formats as well as our entertainment business, which contains a mix of voucher-based and non-voucher-based deals. We view these revenues as one category, as they represent our efforts to provide subscribers with high-quality local deals, whether it is a restaurant, spa, activity, show, or concert event.

Now, let's take a look at the revenue by type for each segment, starting on slide 7. North America second-quarter revenue, broken down by type, shows travel decreasing sequentially by 6% and increasing 3% year-over-year. The sequential decrease is due primarily to seasonality. The year-over-year increase is due to the increase in our hotels business, fueled by our Getaways offerings, offset by continued reduced spending by certain online travel agencies, as well as airline consolidations and competition.

North America Search second-quarter revenue was flat sequentially, and declined 6% year over year. While Fly.com continues to grow, this was offset by declines in SuperSearch revenue caused by our reduced spends, some challenging pricing for traffic acquisitions, and reduced spend by the airlines.

North America Local revenue increased by 16% sequentially, and increased 15% year-over-year. Our management and sales force additions continue to build out a foundation for continued growth. The metric for us continued to be stable, with our deals now reaching 125 markets, and average deal size of approximately 25,000, and almost half the purchases made up of repeat buyers.

Turning to slide 8, you see the breakdown of revenue for our Europe segment. Europe Travel is showing a 2% sequential growth and an 8% year-over-year growth, despite a tough economy and competitive landscape. We are pleased to see the sequential growth in what normally is a down quarter. This was, in part, the result of our efforts to get additional sales staff in place early in the quarter.

Europe Search declined sequentially and year-over-year, 22% and 24%, respectively, due primarily to our reduced spend on traffic and reduced spend by airlines.

Europe Local was flat sequentially and grew 28% year-over-year. This quarter was impacted by the extra holidays such as Easter and the Jubilee. You can see further history of our quarterly revenue by type in the appendix to this presentation.

Overall, we would like to be delivering higher revenue growth; however, we are confident with the right investments in sales staff and audience we can spur future topline growth.

Slide 9 provides more detail on our operating income. We achieved record operating income of $10.4 million. Of this total, North America contributed a record of $7.8 million, while Europe contributed record profits of $2.6 million. This was our sixth consecutive quarter of profitability in Europe.

Our income tax expense was $3.1 million. Niche components led to a record quarter net income of $7.3 million and record quarterly EPS of $0.45.

Turning to slide 10, you can see our cost of revenue on the left-hand side. Since last year, our cost structure has changed due to the buildout of Local Deals and Getaways. Cost of revenue declined sequentially, due primarily to lower subscriber refunds. On the right, you can see that our operating margins sequentially increased. This was driven by lower cost of revenue and legal and professional fees. We expect legal and professional fees to increase in the second half of the year.

Year-over-year operating margins increased significantly, due to a $2 million reduction in TV advertising. This profitability provides us with the opportunity to fund future investments to spur future topline growth, such as investing in sales headcount and marketing spend, which Chris will talk more about in the strategy section.

Slide 11 captures our operating expenses. As a percent of revenue, North America decreased, due primarily to a $2 million reduction in TV advertising. Europe operating expenses as a percent of revenue decreased, due to decreased marketing spend as we focus more on ramping up our salesforce.

Slide 12 shows that our headcount increased from 360 to 374 this quarter. We continued our hiring in this quarter, and have 10 additional sales staff signed up to start after June. We are on track with our goal of hiring 50 additional sales staff that we set at the end of Q1. We intend to continue to hire, while focusing on productivity.

Turning to slide 13, you can see that we are maintaining our strong collections and growing our cash balance. We ended the quarter with $54.2 million in cash and cash equivalents. This was up from prior quarter as a result of our operating cash flow of $7.1 million, demonstrating our strong financial position.

On slide 14, our financial results this quarter are summarized. We achieved across-the-board record revenue and record operating income, including for each of our business segments. And we reached a record quarterly EPS. This strong profitability and cash position will serve us well as we look to increase our investments in our business to spur topline growth. Well, that wraps up the financial summary for the second quarter.

Now Chris will cover some highlights regarding Travelzoo's growth strategy.

Thank you, Glenn. So let's turn to slide 16, which captures the essence of our business model. On the one hand, we are growing our audience, which you can see on the X axis. On the other hand, we're introducing new products to grow our revenue per subscriber over time, which you can see on the Y axis.

Over the last few years, our growth has come from the introduction of Local Deals and Getaways. This has been transformative for our Company, engaging us more directly with our subscribers and expanding the breadth of our offering.

Despite the success of Local Deals and Getaways, our topline revenue has slowed. This is due, in part, to the fact that we're lapping a period of rapid expansion, but also due to a reduction in spending by airlines and online travel agencies; a tough environment in Europe; and increased competition.

While we are disappointed about the slower topline growth, we are confident in our industry position as the high-quality leader. And we're pleased that we met our objective of consistent earnings growth amid an industry of loss makers. We now find ourselves in the enviable position of being able to invest in future growth while returning profits.

Our four strategic elements, which we believe will spur future growth, are -- to ramp up our sales force and improve productivity, which you already see that we're doing; we accelerate subscriber growth through incremental investment; invest in product innovation and subscriber engagement, to capture more of the opportunity; leverage the Travelzoo network to further distribute Local Deals and Getaways.

And I will give you an update on our plan around the strategic elements in the next few slides. Turning to slide 17, this provides you an update of our salesforce hiring efforts. Last quarter, we set a goal of hiring 50 additional sales staff worldwide. We've made good progress this quarter by hiring over 30 sales staff, some of which did not start by the end of the quarter, but will shortly. It will take approximately 6 to 9 months for these sales staff to ramp up to full productivity, but we're pleased with our progress so far.

Slide 18 covers our next strategic element, which is to re-accelerate subscriber growth through incremental investment. This is a new strategic element that we're announcing today for the first time. We slowed our subscriber spend over the last 12 to 18 months to allow us to invest in new products and people. We feel that we've made good progress along our Y axis. So now, we intend to increase our investment in subscribers to spur growth along the X axis.

Our focus will be beyond merely adding new subscribers to the count. Now we have deeper analytics. Because people have purchased with credit cards, we will be able to look to attract certain types of subscribers; and not just across the e-mail, but also on mobile and social. With this in mind, we're planning on significantly increasing our marketing spend by $3 million to $4 million per quarter for the next 18 months, which will reduce EPS by approximately $0.15 to $0.20 per quarter.

Although our expectation is that these investments will take some time to reap rewards -- about 12 to 24 months -- we believe this is the right investment for long-term topline growth. With a ramping in spending, we will likely see increased CPAs. These investments will be focused on key markets where Local Deals are more prevalent in the US, UK, Germany and Canada.

Slide 19 captures our third strategic element -- product innovation and subscriber engagement. Two years ago, we knew where our subscribers lived. Today, for those who've purchased a Local Deal or a Getaway, we know more than 36 data points about them, such as their gender, income level and family status. We're using this information to reinforce the quality of our audience to our merchants. And in this case here, you can see a private club atop the Willis Tower. And we were able to demonstrate that 60% of the guests that we sent to this establishment are among the wealthiest people in America.

This information changes the merchant relationship, builds trust, and sets us apart from the myriad of local deals companies. And that is why we're now seeing businesses like this private members club, and brands such as Nobu in Dallas, joining us.

In time, we'll use this information for further product innovation. In addition to subscriber analytics, we continue to invest in product innovation to address changing market demands. We launched Getaways to address both the opportunity and the desires of some of our hotels not to pay an advertising fee up front, but rather to pay upon performance.

We will further explore the needs of hotels for direct booking. And we are testing a commission model. In addition, we are investing in mobile. Our base mobile platform is now live in all countries across iPhone, Android and mobile. We've received very positive reviews, and are seeing rapid adoption.

Mobile is now 25% of our traffic, up from 10% just a year ago. In the past quarter, we saw our mobile download count doubled to almost 1 million downloads; approximately 5000 people a day downloading the Travelzoo apps. We have much more to do in mobile, but our early efforts are positive. And we are confident that we are in an ideal content category for this medium.

Turning to slide 20, I want to share with you our fourth strategic element, which is to increase the distribution of our deals outside the Travelzoo subscriber base. For example, we have access to 65 million monthly unique users across websites such as the Los Angeles Times, Lonely Planet, PopSugar, and the New York Times, via the Travelzoo network. Historically, these sites have distributed our travel advertising deals. But in Q2, we saw some success at distributing Local Deals and Getaways. We will be focusing more on this opportunity in the months ahead.

To wrap up on strategy, we believe our profitable approach and strong focus on quality leadership, combined with our four strategic growth elements, positions us very well for long-term future success and growth.

We have an outstanding array of high-quality deals across the three content categories that we serve -- local, entertainment and travel. We look forward to further expanding our coverage in these categories while attracting a much larger following.

Moving on to the last slide, 23, I want to conclude by summarizing our continued areas of focus for 2012 and 2013. First and foremost, we will maintain quality leadership in this space by publishing high-quality deals and tightening our brand control. We plan to re-accelerate topline revenues by investing primarily in salesforce ramp up, and new subscribers and audience growth.

We'll continue to leverage subscriber analytics to deepen our level of product engagement. And we'll enhance and scale our new products, particularly within mobile and hotels. And lastly, we plan to invest in future growth while remaining profitable.

As I pointed out earlier, we are not satisfied with the recent slower topline growth. However, our solid profitability and balance sheet have put us in a position where we can confidently invest, incrementally, in our business to spur topline growth for the future.

This concludes our prepared remarks. As a reminder, Travelzoo's consistent practice is not to guide -- not to provide guidance for future periods, because of the dynamics of the industry.

Now I'll turn back to the operator for the question-and-answer session.

(Operator Instructions). Ed Woo, Ascendiant Capital.

Yes, thanks for taking my question. I had a question about the guidance for increased investment in marketing or mobile spending; the $0.15 to $0.20 per quarter. Do you think that that's going to be offset by revenue growth right away? Or do you think it's going to be a slower ramp to catch up with that?

Good morning, Ed. Glenn will answer this question.

Hi, Ed. Yes, there will be a lag. What we've seen in the past is, it will be anywhere from 12 to 24 months for the revenue of those investments to really start kicking in. Obviously, the majority of the ramp up is in that period. I think we'll see some in the near-term, but I would count on 12 to 24.

Was there any concerns, in terms of doing such a big jump in investments currently, versus doing something more gradual? Or was there some type of opportunity that you see in the marketplace to step it up just quickly?

Ed, may I just comment? And, then, Glenn can comment also on this. We've spent the last few years putting in a brand-new business into Travelzoo. And we really focused on productivity within that business; and not just on our salesforce, but also through our audience. What we're seeing is, we are the most productive in the industry set within that local voucher-type business. So we are satisfied, now, that we've achieved what we set out to do.

And what we are seeing on the audience side is very strong repeat rates. Half of people who are purchasing a second deal -- or purchasing a deal -- already purchased one before. So that gives us confidence, now, to say, okay, that's good. The systems are in place; the processes are in place; we can add heads relatively easily; we're demonstrating that we can do that. So, now, it's time to put our foot back on the gas on audience growth. And we're very excited about the quality of our content.

I mentioned Nobu in Dallas and a few others, but we just now need more people to know about these phenomenal deals that we have.

Glenn, would you like to add anything to this?

Yes. The only thing I'd had is, just it's -- we've got a profitable business, and the opportunity to put that capital to work, to grow our business across the board is -- it's exciting. And as Chris said, we've made the investments in the product, and building out a new business, and adding people. And we think we want to do the audience in addition to that. In the last, I would say, 12 to 18 months, those investments were -- it was more of a trade-off. We didn't invest as heavily in the audience. And so now we're stepping it up on that, as well.

All right. And the other question I had is, have you seen any change in the level of competition in these local deals -- I know you don't do daily deals -- space, either changes in being able to sign up new merchants or changes in commission rates?

Glenn can answer that question.

I don't think anything dramatically has changed. It's still highly competitive out there. There's always pressure on the take rate. I would say ours are relatively consistent. But our view is, it's a one-by-one situation, it's the really high-quality establishment. We're not going to chop our take rate in half, but we're also going to look at the wider opportunity. But compared to last quarter, no; no big change in competition. I think it's just highly competitive out there. There's a lot of options out there.

But as we said last quarter, our hope -- and what we think we're seeing in the market is the smaller ones are going to -- that are on the lower end -- are going to start dropping out because they're going to lose their funding, and not have the ability to sustain a business. And that's where we feel really confident, because we're in a position where we are earning a profit in this business. And we think we're poised to take advantage of the opportunity.

Great. Thank you and good luck.

Thank you, Ed.

Dan Kurnos, Benchmark.

Just to start with, Chris -- at first glance, just looking at the numbers before getting into the presentation -- it looks like you didn't pursue your re-acceleration strategy; and, if anything, ran your expenses a bit leaner than expected. But then you noted that you hired sales staff to begin after June.

Just curious if you could give us a sense of why you didn't opt to pursue this more aggressive strategy in this quarter, and if there was anything in either the industry dynamics or other factors that influenced your decision on the timing of spend?

Well I think, if you recall, we announced that about -- we announced that intention about three weeks after the end of the last quarter. And that gives us 10 weeks to achieve the goal. It's not realistic to hire all of the people within 10 weeks. People generally need -- you find the people; that could take you 4 to 6 weeks to find the right candidate and get them through the interview process -- then they need to resign.

It somewhat also could be skewed, and the US you could give a two-week resignation or you could probably walk out the door immediately. But in Europe, some people need to give three months' resignation in order to start. So it's not that we didn't pursue aggressively, we certainly did. But I think it's a normal time horizon that we applied there.

Okay. You mentioned here about the subscriber re-acceleration, which I think you actually had touched on in Q1. I'm kind of curious how you feel about pricing on the cert side, as it relates to marketing in that area? You've clearly committed here to a more aggressive re-acceleration strategy, but are you concerned that the initial return might be somewhat limited by the higher current pricing environment? And do you think you might keep spend more towards the bottom of your quarterly range at the beginning, and possibly increase it towards the higher end over time?

There were lots of questions in there. So, okay, I really don't know yet. You don't know pricing at this level until we start to spend and put our RSPs out. With respect to subscriber spending, and the way in which we go about acquiring subscribers, obviously, changes now that media has changed. I mean, it's more social, it's more mobile. It's a little bit of a different world.

With respect to search, I think that's a separate group within our organization. And we don't typically use search to acquire subscribers, so they are somewhat unrelated.

Do you have a preference, international versus domestic, for where you think you'll target your subscriber adds, going forward?

Well, we said in the presentation that we're looking at the US, Canada, UK, Germany, and wherever we can find the most attractive advertising opportunities. And we would pursue it as -- for us, those markets are of equal importance. And then within the United States, obviously, it's where we have the Local Deals platform running in the major MSAs.

Okay, great, thanks. Sticking with the expense theme for a second, you did mention that your cost of revenues was down significantly in the quarter, versus your run rate of closer to $4 million, and down sequentially as a percentage of revenue. You talked about the lower subscriber refund as the driver there. I'm just curious if you could give us some color on how we should think about cost of revenues going forward?

Glenn, would you answer the question, please?

Yes. I would say, they are always going to be impacted by the subscriber refunds. I think we have had some spikes in that in the prior quarter, in Q1, from a couple deals. But as time passes, I would say at this level or in the 90%, low 90s level, is what we would expect. We think we've done a good job at assessing the risks upfront, the merchants, which kind of limits the refunds that flow through the cost of revenue. Because we can delay -- the payment terms are different for riskier merchants than they are for a high quality.

Got it. Chris, just again, on the international versus domestic -- as you ramp your headcounts, I'm curious where you see the greater market opportunity, and if you have a particular focus in the near term, one versus the other?

The four markets I mentioned is where we have the focus at this time. These are our big markets; and, for us, they are equally important. Obviously the US is still our largest market. It's the largest territory. So I would think we would have more focus there. But the UK and Germany, over time, will see a ramp, too.

And one other thing on that subscriber growth -- you said, why didn't you guys accelerate faster last quarter? Please don't miss that point that we added 500,000 downloads to our mobile app. And that doubled the penetration amongst mobile. That's not in that first number you see on new subscribers added. So we're not calling those people subscribers, but they are engaged. And we are looking at the lifetime value of those people. And for us, that's tremendously exciting. And that's really where we switched our attention in this last quarter.

Got it. Just a couple more from me -- generically speaking, we've seen fundamental resilience in the broader travel market, and within travel search advertising. Could you give us some insight into what you're seeing from a macro perspective, and how the landscape looks to be shaping up for the remainder of the year?

Yes. I would say, from our perspective, prices are relatively high at this time, in search. And that demand -- that's also an indication that demand is relatively -- it's not high; but it is, I would say, medium to high, relative to our experience in the past.

And on the broader travel market, any macro insights, either domestically or internationally?

Well, obviously, you have the airline consolidation, so air prices are high. It seems that there might be some opportunity for us, particularly across the Atlantic, coming into the fall. And we definitely saw more hotel deals in major cities this year versus last year. It seems that consumers may have pulled back a little bit more. And, you know, it's always those things, it's more anecdotal, too, which is -- can you get a reservation at the hot restaurant? It seems that it's possible, which tends to indicate that demand is a little softer at the moment. But I think it's probably better to look at the analysis of the banks, and then you can understand that better.

Sure. And then just lastly for me, on a Company-specific note, how do you think you've fared and what have you done to recover some of the lost revenue that you noted in Q1? And you did call out that continued shift away from third-party marketing by the travel intermediaries. I'm just curious how long you think that will persist? Thanks a lot.

I think these businesses -- the third parties -- that they're going for efficiency. They are rather going for profits than revenue growth. And that's what we're seeing across a group of private and public companies in that space, so it's been rather static. Some of them have pulled back. Some of them went out of business in Europe. So that's what we saw. I don't think it particularly changes very much. The smaller- to medium-sized guys, it could change with seasonality as we get into the winter, particularly in Europe. Some of those businesses may fail because they may not have the cash to get through the winter, so that's a concern. But I think we had the same concern last winter. I would say, no change, would be my overall remark.

All right. Thanks a lot, again.

I'm not showing any further questions at this time. I'd now like to turn the conference back to Mr. Loughlin.

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

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