Travelzoo (TZOO) 2012 Q3 法說會逐字稿

Good morning, everyone. And welcome to the Travelzoo third-quarter 2012 financial results conference call.

At this time, all participants are -- 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 2012 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'd like to remind you that all statements made during this conference call and presented in our slides that are not statements of historical facts 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 out 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 today's format, we'll review our third-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 3, this provides you the key financial highlights for the quarter. Our revenue came in at $35.4 million this quarter, which is an 8% year-over-year decline. This was the primary driver of our reduced earnings per share of $0.22, along with the investments in sales force expansion and subscriber marketing. In addition, we showed modest growth in new subscribers.

Slide 4 provides you detail of the $3.3 million year-over-year decline in our revenue. This was driven by two primary factors. The most significant decline was from our Search revenue, which declined $1.9 million year over year. The majority of this year-over-year Search decline was in North America SuperSearch, primarily due to lower revenue from hotels. Compared to last year, it has been more difficult to acquire traffic because of Google's integration this year of hotel Search products under their main Search results page.

Adding to the overall Search decline was lower Europe Fly.com revenue, which was the result of our focus to bring SuperSearch Europe to profitability and led to less traffic driven to Fly.com.

The second largest contributing factor to the overall year-over-year revenue decline was that local revenue declined by $1.2 million, which was driven by lower voucher sales per deal, a highly competitive environment, and our self-imposed restrictions lead by our focus on quality and our focus on not expanding too far from our core offerings. We attribute the lower voucher sales per deal to a natural setting of consumer interest for voucher deals, seasonality, and known challenges with our own conversion process.

Travel declined year over year due to a reduced revenue from airlines, online booking engines, and vacation packagers. However, this was offset by continued growth in our hotel space, driven primarily our Getaways hotels offering. We continue to believe hotels are an opportunity for us to deliver value and earn additional revenue over time.

The next few slides will give you some further breakdown of our revenues.

Slide 5 gives you the breakdown of revenue by segment. Revenue in North America was $25.1 million, representing a year-over-year decline of 10%. North America is where the majority of the consolidated revenue decline resides, driven by Search and Local revenues.

In Europe, revenue declined by only $400,000 or a 4% year-over-year decline. In local currency, Europe revenue declined less 2% year over year.

The next two slides provide some more insights on revenue by type within our segments.

As you recall, we break our revenues into three types. The first type, travel, is our core revenue, as well as our more recent Getaways voucher format. The second category is Search, with includes our complementary Search tools, including SuperSearch and Fly.com. And the third category is Local, which includes our Local Deals voucher format, as well as entertainment deals that may not use the voucher format.

Turning to slide 6, as I mentioned earlier, North America revenue made up the majority of the consolidated year-over-year revenue decline, as it holds the lion's share of Search and Local revenues, both of which experienced declines. Again, a tough hotel traffic acquisition market reduced our ability to spend efficiently to drive Search revenue. And the decline in vouchers sold per Local deal drove the Local revenue decline.

The only other area I would highlight is that our travel revenue also declined year over year due to advertiser spend reductions by certain online booking engines, airlines, and vacation packagers.

These declines were offset with our continued growth in hotels revenue, which was driven by a 45% year-over-year growth in our Getaways format. We were able to continue to grow Getaways year over year through publishing more deals, offset by a drop in the number of vouchers sole per Getaways deal.

Turning to slide 7, this shows the breakdown of revenue for our Europe segment. Here, you can see the biggest driven of the 4% year-over-year decline is the $600,000 decrease in Search revenue. Unlike the North America Search decline, not much of this decline was due to hotels, as hotels are not a large component of the Europe Search revenue. The reduction in Europe Search was driven more by our decision to pull back on spend to improve profitability, in particular, on our SuperSearch product.

The Search decline was offset by an increase in travel, which can be attribute to Getaways and some traction with our additional sales force we hired earlier this year.

You can see further history of our quarterly revenue by type in the appendix to this presentation.

Slide 8 provides more detail on our operating income. The $5 million year-over-year operating margin decline was due primarily to the North America operating income decline since the majority of the overall revenue decline and then investments in headcount and subscriber marketing were all in North America.

We were pleased to see continued profitability in Europe despite the challenging economic environment and the Summer Olympics this quarter. We did see some benefits (inaudible) to net income, including an FX benefit, as well as a state tax benefit related to prior periods.

Turing to slide 9, you can see our cost of revenue on the left-hand side and our operating margin on the right-hand side. The cost of revenue is impacted by the declining revenue and some increased subscriber refunds. The decline in operating margin was the result of the decline in revenue and continued investments in headcount and subscriber marketing.

Although we are not pleased with this decline in operating margin, we feel confident that the investments we are making are the right investments to drive future growth.

Slide 10 captures our operating expenses. Our North America operating expenses increased by $2.3 million year over year, due primarily to a $1.7 million increase in headcount-related costs due to our investment in additional headcount, as well as a $600,000 incremental subscriber marketing investment this quarter.

Europe operating expenses were relatively flat.

We expect increased operating expenses next quarter from the continued ramped up of headcount-related costs, increased legal and professional fees, and increased costs due to the development of our hotel booking platform.

Slide 11 shows that our headcount increased from 374 to 407 this quarter. We continued our hiring this quarter focused on ramping up the sales force. We are on track with our goal of hiring 50 additional sales staff that we said at the end of Q1. And we feel confident this is still a worthy investment for future growth.

As we add this additional headcount through a quarter, the full cost of these heads normally takes another quarter to fully appear in the total quarterly costs, given that the heads are not all added at the beginning of the quarter.

We are monitoring the productivity of the sales force and believe they are on track to fully ramp up to our expectations over the estimated 6 to 12 months we have seen in the past.

Turning to slide 12, you can see that we are maintaining strong collections and growing our cash balance. We ended the quarter with $57.6 million in cash and cash equivalents. This was up from prior quarter as a result of our operating cash flow of $6.9 million, offset by our $3.6 million stock repurchase.

On slide 13, our financial results this quarter are summarized. Our revenue decline year over year was driven primarily by Search and Local in North America. We maintained our investment in headcount and subscriber marketing, as we believe this will help our growth in the future. These investments led to short -- to a short-term hit in our profitability. However, we maintained a profit, positive cash flow, and our solid cash position.

We realize these -- the investments come amidst top-line challenges, yet we feel confident they are the right investments for our future growth.

Well, that concludes the financial summary of our third quarter. Now, Chris will cover the highlights regarding Travelzoo's growth strategy.

Thank you, Glen.

I'd like to begin by saying that while we are disappointed with the results of this quarter and we do face some near-term challenges, we are confident in our future growth opportunity.

The chart on the left shows you how we grow our business. We have two inputs. On the one hand, we're growing our audience, which you see on the x-axis, and on the hand, we're increasing our revenue per subscriber, which you see on the y-axis.

We grow our audience by investing in marketing. Revenue per subscriber grows as introduce more products and services to our subscribers. Over the past 14 years, we've been very successful in executing on our business model.

On the right, I highlight the near-term challenges we're facing and our longer-term opportunities. As Glen already pointed out, we've experienced challenges with our SuperSearch and Local Deals offerings and this negatively impacted our revenues.

Our investments in sales force expansion and audience growth impacted our earnings. And we continue to experience headwinds costs by airline consolidation and a challenging economy, particularly in Spain and France. Despite these challenges, we remain confident about our future opportunity.

And we're focused on our four strategic elements, which we believe will drive future growth. Sales force expansion. Audience investment. Further product development, especially in hotels. And taking advantage of the shift to mobile, for which we are well set up. So let's turn to the next slide and review these strategic elements.

At the end of Q1, we set a goal of hiring 50 additional sales staff worldwide to drive future revenue growth. On the left, you can see that we have made good progress, in accelerating hiring in Q1, adding over 20 sales heads. We'll continue to ramp up to our goal of 171 sales staff, but we'll moderate our pace as revenues come.

On the right, you can see how sales managers ramp over time. Now, this data was taken specifically from our Local Deals segment in North America. But the data points apply also to our hotel segment.

We expect to take the full year for our new sellers to reach their full potential. Once at full potential, they should be generating in excess of $500,000 in revenues a year. This ramp-up period obviously means that we incur significant expenses in the short term. But as sales managers hit their one-year mark, we begin to see our investments paying off.

Let's move to slide 17. I'd like to cover our next strategic element here, investing in audience growth.

One the left, you can see how over time, audience growth has been a key driver of our revenue growth. For example, today, we have more than 6 million subscribers in Europe. And we're annualizing at approximately $40 million in revenues there.

In 2005, we didn't have an audience Europe. And subsequently, we had zero revenue from that region. To grow our audience, we invested in marketing. We began to accelerate our investment in Q3, spending $1.2 million on subscriber marketing more than the prior quarter and $600,000 more than the prior period.

Our incremental spend was focused mainly on advertising on line. We plan to invest aggressively in audience growth, but we'll balance our speed of investment with our desire to keep up with our financial objectives.

It's worth pointing out that we have traditionally focused on acquiring email subscribers with very low CPAs. We're now focusing on email, mobile, and social subscribers, and lifetime value metrics are becoming increasingly important for us.

Because we are now the seller -- for example, we sell a voucher for a Local Dealer or Getaway, rather than passing off the user to another website -- we can see the value of a customer over time. And so lifetime value becomes more important.

We then start to focus on subsets that look like the subscriber who's buying more from us. This might mean that we experience higher CPAs, but overall, we see a better ROI as we hone in on the right subscribers. We generally expect to see a return on our subscriber investment within 12 to 24 months.

Moving on to the next slide, I'd like to talk about our next strategic element, which is product development, specifically in the area of hotels. We have a very long track record of designing and developing successful hotel products that are appealing to both the hotel industry and to our subscribers. And this slide illustrates how our products have evolved over time and what we can expect for the future.

So starting at the top, we launched Hotel Direct in 2001. And this was a breakthrough product that introduced hotels to the very concept of leveraging large Internet audiences, namely our Top 20 list, to stimulate significant incremental demands at the most urgent times. The product proved very, very successful. And today, Hotel Direct is used by more than 2,000 hotels around the world.

The Hotel -- with Hotel Direct, hotels pay us a flat advertising fee. And our deal experts work with the hotel revenue team to develop an outstanding offer that can be featured in our Top 20 list to stimulate these significant bookings.

With this product, we do not participate in the upside of the hotel booking. So whether the hotel gets 100 room nights or 2,000, we're still paid the same advertising fee.

Looking to the future, we believe Hotel Direct will remain popular among those hotels that want our endorsement and are excited about attracting significant direct bookings to their own booking engines. And this might include chains, for example.

But many hotels would rather pay a commission than an advertising fee. And they use a hand off to smaller hotels booking engines and the mobile environment can be quite challenging.

Moving on to SuperSearch, we launched this product in 2004 as a simple and effective aggregation tool that leveraged our user ratings to recommend OTAs for given destinations. We fueled the business with traffic from our own publications, but were also very successful in search engine marketing on Google in acquiring both paid and organic traffic.

While SuperSearch continues to be very popular with OTAs because it delivers extremely efficient bookings, the product is relatively time consuming for users compared to newer comparison models. And it's not so well suited for mobile.

We're conducting a strategic review of the product. And we look forward to introducing our Hotel Booking Platform, which I will discuss in a moment.

Getaways launched in 2011 and was an overnight hit, both with hotels and with our subscribers. We continue to see excellent adoption among hotels, primarily smaller and non-chain hotels.

Hotels really like the commission model and it's also great for us because we can participate in the upside. We're ramping our hotel sales force to capture more demand that we see for Getaways, both here in North America and in Europe.

Getaways currently does not offer the ability for online bookings. This is something we're now working on. But with or without date bookings, this remains a very popular products for a medium to small size hotels and non-brands.

With the Hotel Booking Platform, we intend to offer our subscribers the ability to book hotels, deals directly via our website to mobile products. The key difference between this and Getaways or Hotel Direct is that our subscribers will be able to book the rooms on any night.

Our desire to introduce our own booking platform follows successful commission trials in Q3, which I talked about on our last call. In those trials, we saw a strong adoption among hotels for a commission solution good response from our subscribers. But we also learned that it would not be possible to scale the business sending users to various booking engines. This approach raised challenges in collections and also provided for a difficult experience on mobile devices.

The Booking Platform will further enable our ability to offer commissions which we can track and allow our users to start using Travelzoo every night for bookings and provide a better overall experience on mobile.

Moving on to the fourth element of our strategy, we're making great strides in product development and have staffed up in this area. We're currently in the process of rolling out enhanced photography that really brings the Travelzoo website to life. Travel and photography go hand in hand, so it's no surprise that as a result of these changes, we're seeing higher engagement levels.

Mobile is increasingly important to us. We saw mobile downloads increase 30% on Q2. And 28% of our overall traffic is now mobile in North America and the UK.

We're pleased with our performance in mobile so far. Our business model is well suited for the environment for several reasons.

First, because we're focused on consumer travel and local experiences, which are an obvious fit for mobile.

And second, because 100% of our deal content is revenue generating. And this allows us to monetize well within the mobile environment. So we're not relying on banners, for example.

Moving onto the next slide, I want to show you how we're integrating social media into Travelzoo. If you go to our Local Deals in the United States, you'll see a Facebook plugin. It's called Comments. When users comment on their deals on our pages, a conversation is immediately taken to their Facebook wall. And their friends then start to comment on the deal.

You can see here that Jim Wells, a subscriber, gives his friends a tip about this restaurant here in Las Vegas. Then a friend who may not even be a Travelzoo subscriber says on his wall that the deal is awesome. Then later, another friend further endorses the deal by saying that she always goes to this restaurant in Vegas.

We're excited with our product development plan. With improvements in our hotel product, a better visual communications for offering, and stronger mobile offering, and social media integration, we feel good about our position for future growth in this area.

To wrap up on our strategy, on slide 23, we believe that our profitable approach and strong focus on quality leadership, combined with our four strategic elements, positions us very well for long-term success and future growth. We have an outstanding array of high-quality deals across the three most exciting categories. Local. Entertainment. And travel.

Quality leadership drives loyalty. And we're positioned at the top of our industry in terms of quality. We believe this will serve us well for future growth.

We look forward to further expanding our coverage in these categories while attracting a much larger following and enhancing our products to help us capture further opportunities.

Moving on to the final slide, I'd like to conclude by summarizing our continued areas of focus for 2012 and into 2013. First and foremost, we plan to maintain our quality leadership position by publishing the highest quality deals and tightening our brand control. We plan to regain top-line growth by investing primarily in sales force productivity and audience growth. We will continue to enhance and scale our new products, primarily in the areas of hotels and mobile. And we'll enhance our user subscriber -- our user and subscriber engagements through product development, analytics, and optimization. Expand our mobile offering and social media offering. And lastly, invest in future growth while remaining profitable.

This concludes our prepared remarks.

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

Thank you.

(Operator Instructions). Ed Woo of Ascendiant Capital

Question on the press release a couple weeks ago, you said that you're in process to acquire a hotel booking engine. Just I'm curious what the status of that is? And if you did not acquire a company, will you be building that technology?

Hi, Ed. Great to hear from you. And thanks for the question.

We've been in active negotiations with several companies for the last, I would say, weeks. And we are continuing to assess our options. So we're quite excited about this opportunity.

If we can't get a company at the price that we would like, then, of course, we'll consider another approach.

Obviously, you can't disclose any terms yet. But just in terms of the scale of something like this initiative, do you think that it's going to be significantly capital intensive? Lightly capital intensive? Medium capital intensive? Just so that we can gauge your future capital needs.

Yes. Well, I'll certainly think there'll be some capital required to build, if we build. And if we acquire, then of course, we'll take something -- well, I guess we'll have to figure out how we finance it if we do by -- but it's a little early, Ed, to give you a concrete answer on how we will structure it because we don't really have the candidate necessarily confirmed.

So once we get to that point, I think we'll be able to give you a better answer.

Okay. And the other question I had is, I saw that your incremental marking went up just over $1 million this quarter. I think last quarter you mentioned that you were going to spend $3 million to $4 million. Is this just a ramping up period? Have you changed your expectations on this?

Well, we did begin the marketing in the middle of the quarter. So that's one thing we -- so we're a little late to start. We're putting in the new metrics around lifetime value and so we're also learning. We're focused heavily on conversions and optimization audience segmentation.

What's pretty exciting is that we now have -- we know the income levels as well as the locations of all of our subscribers in North America. And for a large portion, those who've purchased, we have a full demographic set around those subscribers.

So there are investments going on in these areas that are not so obvious , but they also contribute to our success.

We will continue to spend aggressively, which we outlined in the presentation. But we're going to moderate that with -- as we watch our revenues. We state clearly that we want to remain profitable through this growth phase. And so that means we have to pull back. Sometimes we will. But ultimately, we want to get there.

Great. Thank you and good luck.

Thanks, Ed.

Dan Kurnos of Benchmark.

Chris, let me just -- I want to step back for a second and get your thoughts on the overall deal space. I know that you've mentioned in the past about the irrationality of other players in the space. And you mentioned again in the presentation here.

And I'm curious if the landscape has -- how the landscape has evolved here. Obviously, Groupon had some struggles last quarter. And how you look at the long-term outlook in the space. And if you guys, in particular, are seeing any pressure on your take rates?

Well, it's a very competitive space. And there are still many companies out there that are losing large amounts of money. And we saw certainly in this quarter, we saw some of those businesses -- smaller businesses -- go, larger businesses rationalize. So that's still ongoing.

The benefit for us, of course, is we -- there're several benefits. But one is that we are seeing talent in the market now that are trained. And you saw that we were able to bring on 20 more sales people this quarter. Many of those people had worked in this industry before, which is somewhat new to our business. Five years ago, that would not have been the case.

We're also seeing that -- a rising tide lifts all boats -- and there's a lot of mobile innovation going on from the likes of the three or four large players. And we're also participating in these sort of mobile developments.

So I would say overall, those are the positives. It's still fiercely competitive out on the street. But we tend to focus on higher quality restaurants and establishments, where they are concerned about the audiences they're reaching. So we might bump into some of the more luxurious players out there who position themselves as luxurious, but that we just tend to have a much larger audience and can bring a greater response to those establishments.

So on the one hand, positive. On the other hand, challenging.

And then about the future, we're very excited about our future. We're a very well known travel brand. We're a top 100 web -- top 1,000 website in the world according to ELECSA. And we believe that we have a tremendous opportunity that when one of our 22.5 million subscribers, when they're traveling now, maybe they're in San Diego and they see something in the destination that they may take advantage of, as well as at home.

We also see that we've learned a lot more about the commission models through offering the voucher program. And as we introduce that platform, we'll be able to get more engaged with our subscribers on a daily basis as they travel.

So I think our position in the market will be much more skewed towards travel. We're staying out of lots of categories, so we've got the governor on our machine, if you like, that we're not sending out lots of goods, deals, and so forth compared to the others.

And I think that's becoming quite clear to the audience as well. So we're pleased about that.

Great. Thanks for the color on that.

You actually touched on sort of two of my next questions, the first of which, on the headcount front, you mentioned that you're unwilling to over publish in daily deals and that's sort of been a theme for you guys, especially for maintaining profitability.

So I guess what my question is, does that imply that you think there's a large market penetration opportunity available to you, and in which geography specifically? Has that changed from the UK and US?

Well, there's certainly a large publishing opportunity remaining in the United States. There're cities like Nashville, and Memphis, and so forth that we don't publish in.

But we have to approach these opportunities in a profitable sense. So to have two or three people employed to focus on getting local establishment at the highest quality level in Memphis, may not be the most profitable approach. But we might have 5, or 6, or 10 people who would call on 5 or 6 of these smaller cities. And therefore, it would be profitable.

So those are opportunities still for growth. And we think about the strategy we want to publish more, so publish more in the existing markets that we're in. And that comes with time as you see in the sales force ramp.

We also want to publish more in more markets, so there are markets that we don't have alive still. And then we also want to improve our profitability for every deal that we send. And that can come through various things.

For example, in the call, we mentioned that we have some challenges with our conversion process in the Local Deals. It's a known problem. We're working on it. Over the last couple of weeks, we really saw some great improvements where the chance for to going up to the right for our conversion rate.

So these little things can have a tremendous impact on selling more, if you like.

So -- and then the deal structure, that also is something that we're honing in on. Do you offer a fixed menu? Or do you offer a certain discount? And this can have a dramatic impact on how audiences respond.

Great. Just one thing that you just mentioned there and that I wanted to get into just a little bit more was in terms of conversion, I just wanted to ask if you're concerned that maybe Getaways are either taking up too much of virtual real estate on your voucher pages? Or are you seeing any adverse impact from the removal of the number of vouchers sold when you're offering your daily deals?

The -- no -- the Getaways is clearly a very successful product. Glen mentioned on the call, we're up 45% on that product. It obviously doesn't make much sense that Getaways are sitting within the Local Deals environment. That's just a function of how we built the system and we sell vouchers.

We will migrate that into the hotel category. And I think you'll start to see some significant improvements on the visual aspects of the Travelzoo website in time. And that's largely driven by the use -- our ability to give the user or our desire to give the user a much cleaner, simpler view of our product set.

But Getaways has been very positive.

That's definitely something that I was getting at in terms of platform migration. So you answered my next question.

And then finally, in terms of the hotel bookings engine or website, I'm just curious. Obviously, you have sort of a foray or entry into the hotel arena already. But once you get into more of a book-anytime-type platform, you're going to bump up against the OTAs. And I'm just curious how you see competition against them and how you break into that space more heavily?

Thanks.

Well, let's start with the industry as a whole. When you talk to hotels, they're never sold out. Okay? So even with all of the OTAs out there, the hotels are not sold out. And in New York City, many hotels are just -- they're always available on the weekend, even the nicest hotels.

So there's a demand on the hotel side for more business.

The second thing is, from an audience perspective, we have -- just with our -- if you like to call it our flash sales approach -- we have about 100 million clicks a year coming in on hotel deals. Now, many of these people leave, perhaps -- I wouldn't say disappointed -- but maybe they leave and say, "Well, it's a great deal, but I couldn't get it on the date that I want." And therefore, they go and book somewhere else. And maybe they do go and book on an OTA. I see a lot of leakage coming out as a result of that.

So we believe that it's a smart idea to say, "Okay, here's a great deal. It's still available for the dates that you have to travel to get the deal. But maybe if you don't want to travel on those dates, you can still go and you can get this other deal."

And of course, we have no intention in going head to head with the large OTAs. We don't want to be an OTA. We simply want to provide our audience with a service they're craving for from us. And also, provide the hotels with a solution that really helps them on the everyday.

And the last point on it is, we sort of -- we have to take more control of that handoff for the user. If you click from a hotel deal to a small hotel booking engine on a mobile environment, it's just not very good. And in many cases, the consumer ends up calling. And they'd rather do it on their mobile device.

So there's a key driver in there which is, the world is changing. We're seeing a heavy shift to mobile. We're in a great position to take advantage of that. And if we get that platform in now, we'll be good for the future.

Terrific. Thanks for all the color, Chris.

Thank you.

(Operator Instructions).

As there are no more questions, at this time, I'd like to turn the call back now to Mr. Loughlin.

Thank you, Operator.

Thank you, ladies and gentlemen. Have a good day.

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