Travelzoo (TZOO) 2012 Q4 法說會逐字稿

Good morning everyone, and welcome to the Travelzoo fourth quarter 2012 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. You may begin.

Thank you operator. Good morning, and thank you for joining us today on Travelzoo's fourth quarter 2012 financial results conference call. I am Chris Loughlin, Chief Executive Officer, with me today is Glen Ceremony, the Company's Chief Financial Officer. Glen will walk you though today's format.

Thank you Chris, and good morning everyone. Thank you for joining us.

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 facts constitute forward-looking statements, and are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Actuals result 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-Q and 10-K, 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. And archivedrecording of this conference call will be available on the Travelzoo Investor Relations website at www.Travelzoo.com/IR beginning approximately 90 minutes after the conclusion of this call.

For the format of today's call, I will review our fourth quarter financial results, and then Chris will provide you an update on our strategy. Thereafter, we will open up the call for our question and answer session. Now please open our management presentation to follow along with our prepared remarks. The presentation is available at www.Travelzoo.com/earnings. Slide three provides the key financial highlights for the quarter. Our revenue came in at $37 million this quarter, representing a 5% year-over-year growth. Our earnings per share this quarter was $0.24, which is lower than prior years due to our investments in sales force expansion, marketing, and our hotel booking platform. In addition, we saw growth in new subscribers.

Slide four highlights our revenue by segment. Revenue in North America was $26.4 million, representing a year-over-year growth of 3%. In Europe, revenue was $10.7 million, representing a year-over-year growth of 10%.

On slide five, the North America year-over-year revenue increase of $900,000 was driven by the increase in our local and search revenue. The local revenue increase is driven primarily by the increase in our sales force that resulted in more deals being published, offset with a reduced number of vouchers sold per deal. The search revenue increase was due to the fact that last year, due to market factors, we pulled back more significantly on spend than we did this year. We still are impacted about some of the trends in travel that we highlighted in prior quarters, such as reduced spending by certain online booking engines, airlines and vacation packagers. However, this is offset by our over 50% growth in our Getaway format for hotels. The Getaways are also the primary driver's of the $1.3 million sequential growth in Travel. On slide six, the Europe year-over-year revenue increase of $900,000 was due primarily to our Travel revenue. We are pleased to see that our investments in our sales force are starting to pay off in Europe.

Slide seven provides some detail on our operating income and net income. We generated $4.4 million in overall operating income, of which $1 million was from Europe, and the rest was from North America. Our investments in expanding our sales force, increasing our subscriber marketing, as well as the development of our hotel booking platform, all have lowered our current operating income, yet we believe that these are sound investments for future growth. Our tax rate had a favorable impact this quarter of approximately $800,000 related to the release of a portion of our valuation allowance on our European deferred tax assets. We expect to incur tax expense on our European income going forward.

Slide eight shows that cost of revenue remained fairly stable, with a tradeoff between lower subscriber refunds and some higher customer service costs. Our operating margin was similar to last quarter's margin, impacted by our continued investments. Slide nine captures our operating expenses. Our North America operating expenses increased year-over-year by $3.9 million, due primarily to a $1.8 million increase from our headcount related investments, and another $1.8 million of incremental subscriber and search marketing costs. Europe's operating expenses increased for these investments as well. We expect increased operating expenses next quarter from the continued ramp-up of headcount related costs, increased marketing, legal, and professional fees, and increasing development costs for our hotel booking platform.

Slide ten shows that our headcount increased by 10 full-time employees this quarter from 407 to 417. We continued our hiring this quarter, however, we slowed the relative pace of hiring. We are on track with our goal of hiring 50 additional sales staff that we set at the end of Q1, and feel confident that this is still a worthy investment for future growth. We are monitoring the productivity of the sales force, and continue to believe they are on track to fully ramp-up over the six to twelve months that we have experienced in the past.

Moving to slide 11, you can see that we are maintaining solid collections and growing our cash balance. We ended the quarter with $61.2 million in cash and cash equivalents, up from the prior quarter as a result of our operating cash flow of $13 million, offset by our $7.9 million spend on our stock repurchases.

Turning to slide 12, in summary, we had a solid quarter, showing revenue growth in both of our segments. Although our operating income is currently impacted by our investments, we believe that these investments are the right thing do for our future growth. Lastly, we are maintaining our strong financial position with positive cash flow, growing cash, and no debt.

That concludes the financial summary of our fourth quarter of 2012, so now Chris will provide an update on Travelzoo's strategy to drive future growth.

Thank you, Glen. Hello again everybody. As Glen highlighted, we are very pleased with our solid quarter, and confident in both our business model and our investments in people, audience, and products. These are the inputs that will drive future growth. Indeed, we are entering our 15th year of business. Prudent investment has guided us through a decade and a half of profitable growth. To those of you new to the Travelzoo story, you should know that this business was started with less than $50,000 in 1998.

For our entire history we have been very focused on profitability. We have demonstrated an outstanding return on assets. We are very thoughtful of our investment strategy, and we balance our desire to grow for the long term with a keen eye on the bottom line. The chart on the left shows you how our business grows. On the X axis you can see we are growing our subscribers. On the Y axis, we are increasing our revenue per subscriber over time.

Our current investment strategy is focused in three areas. First, we are growing our sales force, this allows us to work with more businesses and publish more deals. Second, we are investing in our audience growth, not just by expanding our traditional e-mail subscriber base, but by increasing our Facebook fans, Twitter followers, and the downloads to our iPhone and Android apps. And third, we are investing in product development. We are focused on improving our engagement and conversion levels,and enhancing our product in mobile and hotels.

Let's turn to the next slide and review how we are doing. Slide 15 highlights our progress against our sales force expansion plan. As Glen mentioned 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 adding 30 sales staff net of attrition. We continue to ramp-up to a goal of 171, but we moderate our pace based on balancing our need for investment and delivering our profit goals. On the right you can see how our investment in sales forces is indeed paying off over time. As you can see, we are publishing more deals in both North America and in Europe. On the lower right, you can see the growth in our Getaways business, which is up 65% since last year. Across the business, we expect sellers to take approximately a year to become fully productive.

Moving to slide 16, we look at our next strategic element, invest in audience growth. On the left, you can see how over time audience growth has been a key driver of our revenue growth. The growth of our audience isn't just about investing into subscribers. We also invest into Facebook and Twitter, and other media as well. Our purchase part optimization efforts, which we said we would focus on last quarter have proved quite successful. We have increased our conversion rate by 16% since the last quarter.

We have also improved the visual experience of our website, and in our experiment in the photos in our Top 20, we noticed improved picked through rates of 14%, and improved sell through rates of 12%. Q4 was in fact one of the strongest quarters for us, in terms of engagement with our subscribers. We are also starting to capture user reviews. In Q4, our subscribers provided just shy of 60,000 reviews. We are currently using these to inform our deal experts enhance the experience that our subscribers have. In the future, we plan to use those reviews to also enhance our products, so you can imagine reviews next to our deals.

On slide 17, you can see we are making terrific inroads into mobile and social. Our apps have been downloaded by 1.5 million people, and we have got a 4.5 star rating in the App Store. We are determined to grow our in-store base, improve the useable of our apps, and we want to get that 5-star rating. We are particularly excited to see that those who have installed the app are engaging with the Travelzoo brand while traveling away from home. Traditionally Travelzoo is the brand that got you there. Increasingly, we are a brand that helps you when you get there.

In social media, especially in Facebook, we are seeing increased interests in our brand and higher levels of engagement. Of the 400,000 people or so who like us on Facebook, we saw 60,000 actions be it likes or comments in Q4. You can see on the right some of the comments that our fans made.

On slide 18, this gives you a glimpse of how we are engaging a two-way dialogue with our audience, and how the experience goes full circle from a customer's prospective. On the left our subscribers are commenting on deals on our website. Those messages then go to their friends via Facebook. These people might not be Travelzoo subscribers, but this is how they learn about Travelzoo through their friends. Once a subscriber has enjoyed a deal, then they comment back through our feedback loop, and this you can see on the right. In this case, you can see that there are 62 people who provided feedback for our deal of Porter's Steakhouse in St. Louis had a 97% positive experience. These new interactions with our subscribers are deepening our relationship and bringing even more trust to our brand.

Turning to slide 19, is our third strategic element, investing in product. Mobile traffic is already one-third of our entire traffic, and we expect this to increase considerably over the coming years. Our brand and content are perfect for this type of media, and that is travel, entertainment, and Local Deals, perfectly suited for that medium. We are shifting our product focus to mobile, and expect to transform our entire product organization to a mobile first organization this year.

On the left, can you see some of the challenges we face in mobile today. When we hand off to this particular hotel to their booking engine, it just doesn't work on mobile, and the reason is because we can't pass the discount code that is inside the URL onto the mobile browser, so as crazy as it seems that this particular hotel, and here we are in 2013, we actually have to write, this deal cannot be booked on a mobile device. You have to call the 1-800 number, now obviously that is not right and we want to solve that.

To solve the journey and to provide easier serviceability of our deals, for example, to allow people to find a deal on a specific date and a place that they want to go to, we are developing a hotel booking platform. The platform will allow users to very quickly find those deals on the dates and in the places where they want to go. Hotels will also find it easier as well. For example, if a hotel wanted to quickly load a last minute weekend rate, they could do it themselves through the system, rather than calling somebody in our office or working through our manual processes.

Slide 20 lays out our timeline through 2013 to develop and roll out the hotel booking platform. The initiative will take some time to roll out. The investment will primarily be in Q1 and Q2. In addition to the actual booking engine technology, we will overhaul some of our content through our existing team, integrate with our existing systems.

For example, we have well over 1 million people who have bought Local Deals with us, and they have accounts with us, and we want to integrate with those people. Most of this will happen in the first half. We will be prudent and balance our need to change, and to this type of model with the fact that we have got a very profitable and robust model already in place. We are excited about the opportunity we have to get this right, and provide both our subscribers and our hotels with a more superior solution than we offer today.

Turning to slide 21, I want to remind everybody that quality underpins everything that we do. I spent several weeks in December speaking with our subscribers, and it is very, very clear that those who use Travelzoo understand that we are far higher quality content than the others. Quality experiences drive repeat and referral behavior, making our brand thrive over the long-term. I spoke to one subscriber in Ontario, and the first thing he said to me was, honestly I don't refer products but I can't tell you how many people I have told about Travelzoo. As I said at the beginning of my comments, we are now in our 15th year of business. Since the beginning it has always been about quality, and for us it will be about quality long into the future.

Concluding on slide 22, our areas of focus for this year are, first and foremost, to maintain our quality leadership position by publishing high quality deals and planning ground control, reaccelerate top line and long-term revenues by investing primarily in sales force productivity and new subscribers, continue to enhance and scale our new products, particularly by enabling our online booking capabilities for hotels, and becoming a mobile first business over time. We will seek to enhance our engagement through product development, analytics, and optimization. And lastly, we plan to invest in future growth while remaining profitable.

Thank you for joining us. This concludes our prepared remarks. Now I will turn it back to the operator for the question and answer session. Thank you.

Thank you. (Operator Instructions). Our first question comes from the line of Dan Kurnos from The Benchmark Company.

Yes, good morning, guys. Just a few things for me. In terms of unduplicated subs, growth was a little bit muted sequentially, although you did call out some pull back in spend in Europe. Just wondering what should we expect in terms of growth going forward? Should we expect to see it accelerate through 2013, and which channels have you guys found most effective so far?

Hi Dan, good morning. We were very pleased actually with the audience, particularly on Facebook in Q4. We added over 200,000 fans, and we saw the highest engagement level we have seen with 60,000 posts or comments, that was a key focus for us in the quarter, and we are beginning to look holistically at our interactions with our audience. So while traditionally Travelzoo has been about e-mail interaction, we are seeing real benefits through social media, Facebook, Twitter, and mobile. We plan to keep our foot on the accelerator with our investment, but obviously we will pull back if we are unable to pull off our profit targets.

Okay, great. Then on travel, could you maybe give us some more color on how much of the 23% growth in Europe was Getaways versus your traditional travel model? Then on Getaways in general, maybe if you could give us a broad-brush picture of how much runway you think you have in the Getaways market, and which geographies look most promising to you in the near-term?

Glen, do you want to answer the first half of the question, I can talk a bit more about the markets and so forth?

Sure, Dan. You are saying that 23%, we don't split out the Getaways portion, but a significant piece of that is the Getaways, so we are pleased with the growth, that overall growth of 65% on the Getaways overall, helped Europe as well, but not entirely that in Europe. We are happy with that kind of curve in there in Q4 at 23%. Does that answer your question, Dan?

Yes, go ahead Chris.

The runway, I said this on the last call. At the moment what we are doing is we are sending out a getaway to a subscriber, the subscriber that we have a great relationship with, and they may or may not wish to purchase that particular getaway. If that person comes to our website and wants to find a deal on a specific date, that is quite difficult for them to do, and it is even more difficult on our mobile app. So one of the runways is actually just providing better visibility to the opportunities for those who want to go, and that is the whole idea around our hotel booking platform.

Another opportunity within that business is that one of the key reasons why people are refunding is because they can't get the dates they want. They will buy a voucher, and then they can't get the date that they want. By having the hotel booking system, we can give you date visibility right away. We are obviously ramping our sales force, and that does mean that we are bringing on more territories, we are now publishing deals down in Tennessee and in and around Nashville, which were not classically a focus for Travelzoo. So we will continue to do that, and also I think you will start to see people being able to just by getting better access to information, we hope to see improved conversion rates overall.

Alright. Then turning to local. It looks like we have seen sort of the standard slower start to the year, particularly in the UK, but obviously you had a pretty strong Q4. I am just curious about how you feel where you are in local in general? I know you talked about the analytics changes and you are still ramping headcount, but maybe go into some color on some of the other changes you are making for conversion rates, and get more attention on the local side?

The conversion rates we are incredibly happy with to see such an improvement of 16%, and that was a real concerted effort much. The other thing we have tested in the purchase passes, reviews which we tested in the UK, that was very positive, so people could actually see what other people thought of the place that we were recommending. So over time, reviews will play a bigger role in our business. We have collected over 60,000 reviews in our first quarter, so that is positive. The other thing we saw in local is an increased revenue on mobile for those Local Deals.

One of our key ideas around these local deal is that we have a lot of travelers, and we need do a better job of communicating and messaging to those travelers that when they get to Las Vegas, they get to San Diego, we have got great deals that they can buy. We already see it, it is a significant portion of our business, but that will be a big focus for us. You will notice on the site that there are some deals that are what we call always on, so they may be on for a couple of months. We might not send those deals out via e-mail really because we are expecting tourists to use them, we are pretty excited about what that could mean for us.

You mentioned in your prepared remarks that you want to see increased performance from the existing headcount, so I am just curious what you are doing to improve efficiencies internally, and just also curious on how you see the availability of new talent?

On improving efficiency, that is something that we have been focused on from the first day I walked in here 13 years ago. We are very, very focused in this business on getting maximum efficiency, but it does take time for people to ramp up, and yes, we hired in the year 13 sales people. If you look at our overall headcount, we hired 71 people, so that is really 71 people who either they are somewhere of reaching productivity. Of course, you have got attrition in there as well, which doesn't come into that 71, so there are probably 100 people in this business who joined in the last 12 months, and they are getting up to the highest level of productivity. On the sales side, we always say six to twelve months, and then how we monitor that we tend to group into groups of what we call vast TJV, then we have beginners, and we watch how people move through that cohort over time. I think we are pretty good at that, and we will continue to focus on it.

And on the availability of the talent pool?

It has actually been pretty good for us. We have a solid, profitable business, and our offices are in end markets. For example, in New York, Austin, or Chicago, where many of the people in our industry work for competitors, so we have been able to pull quite a few fantastic people into the business, so we are pretty pleased.

Only one more for me, if you don't mind. I just was curious if there are any differences so when you do launch the hotel bookings platform, if we should see any difference in the economics between the bookings platform and say the Getaways model?

There may well be. I think it is too early to say. The idea is not to turn off Getaways and then launch this. We will take our time, we will run some tests, and then once we fully have got our arms around it, then we will certainly let you know, but it is not going to be exactly the same as Getaways, because we are enabling people to book, for example, if you want to book in a hotel in New York this weekend through a booking engine, it might be slightly different than buying a voucher.

Okay, great, thanks a lot, guys.

Thank you.

Thank you. Our next question comes from the line of Ed Woo from Ascendiant Capital.

Good morning. I had a question regarding the current state of the competition. Do you see any big changes in Q4? Also, how would you characterize the current state of the travel market?

Hi, Ed. Current state of competition. One of the best things I have ever done, and I wished I had done it earlier is I spent most of my December speaking to our subscribers, and what I can tell from you their perspective at least the ones that I spoke with, Travelzoo has the higher quality deals, that is the first thing. The second thing is Travelzoo doesn't send too many e-mails, and the third thing is the content in general that I am sending is what the subscribers thought they signed up for. I can't really say how those businesses are doing, but from our subscribers perspective, it seems that they get a little tired of receiving a JVC speaker set, then the next minute a bikini wax, and it is sort of all over the place. We said two or three years ago in publishing that you need to be somewhat focused. The Financial Times are successful because it delivers what they say they delivers. We have been quite disciplined in staying focused on travel and leisure, and I think that is appreciated by the subscribers.

As far as talent, there is a lot of people, we just talked about, that but a lot of people who are interested in moving to a new business now, and Travelzoo is one of the obvious candidates that these people might want to move to after spending two or three years at one of the other companies. That is how I see it. Of course, those businesses are also realizing themselves that at some point they have to become profitable, so that sort of levels the playing field a little bit for us.

So you haven't seen big changes in either the economics of a deal, being able to sign up new customers, new suppliers, businesses, et cetera?

Not fundamentally. We have seen some of the smaller players go. We have seen some of the irrational behavior stop. Zero commissions, or paying for a billboard for a restaurant just to get a deal, that seems to have stopped, but fundamentally I don't see any other significant changes.

Okay. How would you characterize the current travel market right now? It seems like everything seems to be steadily improving slightly in the US and Europe?

I think that is a good way to put it, it is steadily improving. I think that advertisers are keen to get a head start and make sure that, there is currently no scary news anywhere, so that is kind of the good thing. When there is scary news about economies or natural disasters, people tend to not book their travel, so there is no scary news right now, which means that travel companies should really make hay while the sun shines. I think in general, everyone is quite positive.

That is good to hear. I will keep my fingers crossed that there is nothing major as we see then also, going into your comments about how you were making some investments in this booking engine. Are you no longer primarily interested in acquiring a booking engine, that you guys are going to develop this yourself? Can we see the investment that you did in the fourth quarter, it was about $0.03, is that similar to the investment you will be making over the next couple of quarters?

We did a couple of things in the fourth quarter. One is we bought the assets of a booking engine company, and that was the actual website was called Perfect Escapes, so we took that in, we took a group of people who we think are terrific in, and we are currently overhauling the system, and we are looking at how we integrate into our products. We think that the development process takes probably the next five months to sort of get the initial framework there, that is sort of the heavy lifting. So I think it would be fair to say the investment level will be similar or a little bit more than we have had over the next six months, and then hopefully it is done and we are built, and we go. And, of course, those people who we did bring in, there is no revenue coming from that product today, so by the time we get to Q3 and Q4, then we expect that we should be seeing some decent revenue coming from it.

Great. And my last question is, a couple of quarters ago you mentioned that you guys were going to make a big investment in marketing. Are we seeing that investment being spent currently, and how do you view the ROI so far?

We increased our investment in subscriber marketing. I think again the number, was it $600,000 year-on-year?

Yes.

We increased by $600,000, but this opportunity came up with this booking engine and these people, and it is not just about spending the money effectively. It is also about management and time, so we have our heads down and making sure we secure those assets and bringing those new folks in, and setting a track for the hotel booking platform.

The other thing we focused a lot of energy on, which in the end didn't cost us as much as we thought it would, was on the Facebook thing, so there we brought in 200,000 new fans, and the overall acquisition cost was significantly less than what we might have thought it would be. So that, we would love to continue that in the future. We will see if we can, but in general we are keen to grow our audience on e-mail, through subscribers, but also on Facebook, and on mobile.

Great. Thank you, and good luck.

Thanks, Ed.

Thank you. (Operator Instructions). Our next question comes from the line of Craig Baum from Harvest Capital.

Hi guys, thanks for taking my questions. Two questions. First, what drove the search growth in the US? Was that SuperSearch or Fly.com, and then how does the profitability of search compare to travel and local? Then I have one follow-up.

Glen, would you please answer these questions? Hi, Craig.

Yes. In North America you are talking about for search in the growth on that. The growth on that is obviously it is tied to the spending level. Like I said in the comments, we increased our spend relative to last Q4, and I would say that we don't break out the SuperSearch versus Fly, but the spend between those two will increase this quarter, so we felt it was a relative better market to spend this quarter for that. What was your second question, Craig?

The second one was how is the profitable of search compared to the travel and local segments?

I would say that varies. It has quite a bit, but it is less than those other two businesses, relative.

Got it. Okay. Then, just one point of clarification. Looks like you guys repurchased a decent chunk of shares in the quarter. Glad to see you guys have enough confidence in the business to be buying back your stock. Just curious,I know the weighed average shares aren't an exact number given the timing of the repurchases in the quarter, but based on the information available, it looks like you spent $7.9 millionto repurchase about 260,000 shares, so I get an average price of about $30. Am I missing something, or why does it look like the repurchases were at such a high price?

Shares are higher than that. We are cumulatively at 600,000 shares, and I think we disclosed last quarter that we bought back a little over 160,000, so about 439 or 440 shares.

Great, okay, thank you.

Thanks, Craig.

Thank you. We have no further questions. I would like to turn the conference back for any concluding remarks.

Ladies and gentlemen, thank you for your time and support. We wish you a prosperous new year, and we look forward to speaking with you again in the future. Have a nice day. Thank you.

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