Travelzoo (TZOO) 2013 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Travelzoo first quarter 2013 financial results conference call. At this time all participants have been placed in a listen-only mode, and the floor will be opened for questions following the presentation. Today's call is being recorded. It is now you my pleasure to turn the call over to the host, Chris Loughlin, Travelzoo's Chief Executive Officer. You may begin.

Thank you, operator. Good morning, and thank you for joining us today for Travelzoo's first quarter 2013 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. 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. Actual results could vary materially from those contained in the forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements are described in our Forms 10-K and 10-Q and other periodic filings with the SEC.

Please note that this call is being webcast from our Investor Relations website at www.travelzoo.com/earnings. Please refer to the website for important information, including our earnings press release issued earlier this morning along with the slides that accompany today's prepared remarks. An archived recording of this conference call will be available on the Travelzoo Investor Relations website at www.travelzoo.com/ir beginning approximately 90 minutes after the conclusion of this call.

For the format of today's call, I will review our first quarter financial results, and then Chris will provide an update on our strategy. Thereafter, we will open 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 $42.2 million this quarter, representing 7% year-over-year growth. Our earnings per share this quarter was $0.36, which is lower than prior years due to our investments in sales force expansion, marketing and hotel booking platform. In addition we saw growth in new subscribers.

Slide four highlights our revenue by segment. Revenue in North America was $29.9 million, representing year-over-year growth of 5%. In Europe revenue was $12.3 million, representing year-over-year growth of 14%.

On slide five the North America year-over-year revenue increase of $1.3 million was driven by the increase in travel revenue due to increased spend by certain vacation packagers as well as continued growth in our Getaway voucher offering for hotels. This was offset by a decline in the local revenue from reduced number of vouchers sold per deal compared to the prior year period and a decline in search revenue.

On slide six the Europe year-over-year revenue increase of $1.5 million was due primarily to our travel revenue, driven again by increased spend by certain vacation packagers and cruise advertisers as well as continued growth in our Getaway voucher offering for hotels.

Slide seven provides some detail on our operating income and net income. We generated $8 million in overall operating income, of which $2.5 million was from Europe and the rest was from North America. Our investments in expanding sales force, increasing subscriber marketing as well as development of our hotel booking platform all have lowered our current operating income. However, we believe these are sound investments for future growth.

Our tax rate had a favorable impact this quarter of approximately $250,000 related to certain state tax refunds, which was an approximate $0.02 EPS benefit this quarter. Slide eight shows the cost of revenue percentage decline due primarily to lower subscriber refunds. Our operating margin increased from last quarter's margin due to seasonality and was impacted year-over-year by our continued investments.

Slide nine captures our operating expenses. Our North America operating expenses increased year-over-year by $3.3 million due primarily to a $2.2 million increase from our head count related investments and another $1.1 million primarily due to incremental subscriber and search marketing costs. Europe operating expenses increased due to these investments as well.

We expect increased operating expenses next quarter from the continued ramp-up of head count related costs, increased marketing, legal and professional fees, and increasing development costs for our hotel booking platform. We expect incremental legal and professional fees will result in an EPS charge of approximately $0.04 next quarter.

In addition, the hotel investment will continue to impact our cost, with an EPS impact of approximately $0.04 next quarter. Keep in mind, after we get the hotel booking platform in place, the revenue generated from the hotel bookings will be recognized after the hotel stay occurs, so there will be an expected lag of revenue from the time of booking.

Turning to slide ten, this slows that our head count increased by a net eight full-time employees this quarter, from 417 to 425. We have added production employees to support the additional sales force and have added employees to support our strategic initiatives around both marketing and product development. We continue to monitor the productivity of the sales force and believe they are on track to fully ramp up over the estimated six to 12 months that we have experienced in the past.

Moving to slide 11, we are maintaining solid collections and growing our cash balance. We ended the quarter with $65.1 million in cash and cash equivalents, up from prior quarter as a result of our operating cash flow of $6.5 million. Finally, turning to slide 12, in summary, we delivered record revenues in both our segments, and although our operating income continues to be impacted by our investments, we leave these investments will drive 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 first quarter of 2013. Now Chris will provide an update on Travelzoo's strategy to drive future growth.

Thank you, Glen, and hello, everyone. As Glen highlighted, we are very pleased with the quarter results. They're testament to our outstanding team, the robust business model that we created, and our focused investment strategy. For those of you new to the Travelzoo story, the chart on the left of this slide outlines how our business grows. On the X axis you see we are growing our audience, and on the Y axis we're increasing 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; not just by expanding our traditional email subscriber base, but increasingly we are adding Facebook fans, Twitter followers and downloads to the iPhone and Android apps. And third, we're investing in product development.

We are focused in improving engagement and conversion levels and enhancing our hotel and mobile products to provide more utility and ease use. Let's turn to the next slide to reveal how we are doing. Slide 15 highlights our progress against our sales force expansion plan.

Last year we set a goal of hiring 50 additional sales staff worldwide to drive future revenue growth. On the left you can see that we made good progress through Q1, adding 29 sales staff net of attrition. We will continue to ramp up to our goal of 171 sales staff, but we will moderate our pace based upon our desire to achieve our short-term revenue goals also.

On the right you can see how your investment in sales force is paying off over time. At the top we show we published significantly more deals in both North America and Europe. And at the bottom you can see that out Getaways revenue grew 48% is since last year. It takes approximately a year for our new staff to become fully productive, and we are pleased with our progress so far.

Moving to slide 16, we look at our next strategic element; invest in audience growth. On the left you see that over time audience growth has been a key driver of revenue growth for Travelzoo. To grow our audience we invest in marketing. We began to modestly accelerate our investment in the second half of 2012 and will continue to opportunistically increase our spend levels compared to prior year periods of spend.

In addition, to our spending on subscribers, we are also exploring new ways to grow and engaging our subscribers further. We saw increased levels of engagement on a year on year basis and quarter on quarter basis. We attribute this success to our increased focus and investment in analytics and engagement, growth in social media, and app usage. We've also improved the visual presentation of our products and will continue to do so. We have only just begun these initiatives and look forward to making more progress in the year ahead.

Slide 17 highlights our progress with mobile and social media, and we have made impressive progress in the area in the last 12 months. More than 1.6 million people have now downloaded our iPhone and Android apps. We have over 1 million combined Facebook and Twitter followers. During the quarter we saw a significant jump in mobile purchases and visits from social media.

Turning to slide 17 -- slide 19, sorry, let's look at our third strategic element, investing in product. Mobile traffic is already 35% of our entire traffic. We expect this to increase considerably in the future. Our brand and the content we offer -- travel, entertainment, and local deals at restaurants and spas and tourist companies -- is absolutely perfectly positioned for mobile consumption. We have begun to shift our development focus to mobile and expect to transform to a mobile-first product development organization this year.

On the left you can see one of the challenges we currently face in mobile. When we hand off to a hotel -- in this case, this particular hotel to their booking engine -- it cannot be booked easily via mobile device. To solve the user journey and to provide easier search of our deals on mobile and web, we are developing a new hotel booking platform.

The platform will allow users to quickly and easily search for hotel nights within Travelzoo's apps and on our website and make it much easier for hotels to load rates. For example it will be much easier for hotels to load a last minute rate for this weekend compared to our current solution.

Slide 20 lays out our timeline through 2013 to develop and roll out our hotel booking platform capability. This new product will take some time and investment, and as Glen pointed out, we estimate additional investment in our booking engine of approximately $900,000 this quarter with no immediate revenue benefit. In addition to the actual booking engine we have to overhaul our hotel content and integrate with the existing payment and customer systems.

We will be prudent and mindful of the need for change, given that we already have a very profitable and robust model in place. We are already running early tests through the Perfect Escapes website that we purchased last quarter, and these tests are helping us design our approach for the anticipated wider roll-out of the hotel booking product.

Turning to slide 21, I want to remind everybody that quality underpins everything we do. Quality experiences drive repeat and referral behavior, making our brand thrive over the long run. Since the beginning 15 years ago, it has always been about quality for us, and it will always be about quality in the future.

Concluding on slide 22, our areas of focus for 2013. First and foremost we plan to maintain our quality leadership position by publishing high quality deals and tightening our brand control. We want to reaccelerate top-line revenue growth by investing in sales force and productivity; audience growth and engagement across email, social and mobile; products that simplify and improve business, particularly for online booking capability and for mobile. And lastly, we plan to invest for future growth while remaining profitable.

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

Thank you. The floor is now open for questions. (Operator Instructions). Thank you. Our first question comes from Dan Kurnos of The Benchmark Company.

Yes, good morning. Chris, you have seen some nice acceleration to subscriber growth. I'm curious, maybe dig down a little bit more for us, what part of your new marketing strategy or which channel has proven the most the successful? And besides changing mobile, what is not working or what would you do differently? And do you expect sub growth will accelerate through the balance of the year?

Hi, Dan, good morning. We don't necessarily disclose what is working, because other people copy us, but in general we are pleased with the results. We did spend more on subscriber market, so that is one input that was driving growth, but we are focused on optimizing the sign-up process. We are optimizing on our placements.

I also mentioned in my prepared remarks that we did see a significant jump in traffic from mobile -- from social media. It was quite sizeable, indeed. I can't say hand on heart we he have cracked the code on that yet, but we are very, very pleased with the amount of traffic we were able to bring in from social media.

The second half of your question was what is not working. Well, we can always improve, right? I mean, it is not that we got it perfect yet, and we have a team in place that are very, very smart who will continue to optimize and hopefully improve.

Would it be fair to say that with some of the scale you are seeing you are getting improving return on investment through the marketing channel?

Well, return on investment is a metric that we measure internally, and what we see is if we spend heavily, of course, return on investment drops, because your balance of organic subscribers decreases and advertising drives more subscribers. So there is a balancing act to do on ROI around spend.

But what is true is that we seem to have is come through the fog. A lot more people now understand Travelzoo, understand the quality of the offering that we have. They may have tried us first time with a restaurant deal, and now trying us first time with a Getaway or travel deal, and that [virtual] circle is clearly having a positive impact on the business. And I think the best way you can view that is just look at the comments in social media for our brand compared to other brands. We just -- we do a significantly better job for the people who use our is service.

Got it. Thanks. Shifting over to the Getaways portion. It seems like competition has picked up from the OTAs and airlines themselves, and I'm just wondering if you have seen any impact on the business or the addressable market? I mean, you have grown the business pretty nicely so far.

Well, there is always competition out there, and we continue to face competition. But we are honing our products. Now, for example, a hotel can run a Getaway with us, and we can provide them with reviews when people are checking out, and that helps the hotel understand the quality of our audience and the experience.

We can show percentages of consumers who stayed and plan to return. We can also show demographic information. So our products improving as the competition continues, so -- but, I mean, competition has been part of our life from beginning, so I wouldn't say it is significantly different from the past.

We have also seen some recent signs of softening demand in Europe and the UK in particular in the ecommerce market, and I'm wondering if you could share any thoughts as to whether you are seeing that going forward on the travel side?

Well in travel -- in the UK and Germany we saw strong demand for our products, particularly from cruise operators and from vacation packages. We did enter the year with very optimistic news in general in travel, right? So I think a lot of those operators went as fast and hard as they could. There is I think a general feeling in the UK in particular where people are fed up of bad news and a slowing economy, and they are going ahead and booking their vacation or Getaway anyway.

In the US the situation was a little different, and we ended with very good news. Real estate prices are going up. Both businesses and consumers are feeling confident, and we -- obviously we are a beneficiary of that.

Okay. And then just lastly on the daily deals front, just a couple of questions here. You seem to be getting modestly better traction in some of the larger cities, but maybe limited traction in some of the secondary markets despite all of the head count ramp. I'm curious what your are view of the daily deals market is, and why it was that you saw customers buying fewer vouchers in this quarter?

Well, actually, overall we sold more vouchers, but when say that, it is combination of the Getaways and local deals. So we saw we had more purchases, we had more new purchases, we had more repeat purchases, and we sold more vouchers in general. So that is in the aggregate sense.

We are -- we did send -- we did increase the volume of Getaways that we sent, so one reason there could be that consumers are deciding do they do a restaurant or do they do a Getaway, and not everyone will do both. The second thing is that we are seeing in general fewer vouchers are purchased per deal, and yes, that could be because we are little further along now, 2.5 years into the model, so some people like it. And the second thing we are seeing is a slight decrease in take rate on the restaurant and spa-type deals.

Yes, and just a follow-up on that, because that was the second half of my question, is how much was the take rate impact in the quarter, if you could provide that? And was that directly related to Groupon cutting its take rate as they did in Q4?

I didn't hear that it was directly related to Groupon, but we are subject to competition and business is up now. Restaurants and spas now have this as part of their central marketing plan, right? So they -- this is now you a staple for many of these businesses, and prices -- or rates changed or came down a little. Whether it was Groupon or not, I couldn't tell you. Sorry, what was the second half of your question?

Well, I was just curious how much the take rate was impacted in the quarter, and then secondarily how much of the decline in growth that you saw this quarter was reflecting the reduced take rate versus lower vouchers per deal?

I'm not sure we disclosed the full take rate, but it came down, Glen, slightly?

Yes, just, Dan, relatively speaking, I think the biggest impact is -- from a year-over-year perspective the bigger impact is the less vouchers sold per deal. And like Chris said we are pleased with -- overall we produced more deals compared to last year, but you that trend has definitely impacted us.

The take rate, I would think of it as from a year-over-year perspective it is a couple points. And we have been pretty selective. I would say it is more -- it is less about overall competition and more about selective thinking about how we get the deals that we really want to have the quality in the portfolio that we would like to see.

Got it. Great. Thank you both.

Thank you.

Thank you. Our next question comes from Ed Woo of Ascendiant Capital. You may begin.

Yes, thank you. I had a house keeping question. Do you say that next quarter there's going to be a $0.04 legal charge in addition to the $0.04 investment in the hotel booking engine?

Yes, Ed.

Great. And then the other question I had is obviously you had a very good first quarter. Was there anything specifically that changed in the market? I notice you got a little bit more revenue from vacation packagers. Is that something that is a fundamental shift in our product focus?

No, I don't think anything changed in the market per se, Ed. What we did do is we hired people through the course of last year. Some of those people are becoming productive now. For example, we he have a chap in Manchester in the UK who did a fantastic job in the cruise area and brought a lot of clients with him from his previous role.

So those are things that we hope to see and we are seeing them. And obviously Getaways is up significantly, and as I mentioned before to Dan we did enter the year, particularly in the US, with a great deal of confidence. So those vacation and cruise advertisers seized the moment to get the forward bookings into the summer.

Okay, and have you mentioned when you would happen to have the hotel booking engine fully rolled out?

No, we haven't mentioned when we'll have it fully rolled out. We expect to be able to get the hotel booking engine live towards the back of the year, and we have outlined it in the slide -- I'm not sure which number the slide is. But we are testing right now through our Perfect Escapes website to learn and understand the model and get the organization ready. And, of course, it's delicate balancing act, because we certainly don't want to impact the great progress we are making with existing products such as Getaways.

Okay. And then my last question is on the Getaways. You mentioned that overall your take rate has come down a little bit. Does that include the take rate for Getaways? And what is the pricing environment? Have you been able to raise prices for the email newsletters?

Glen, would you like to answer the question?

Sure, yes. Just as a reminder, the take rate since the beginning has been a bit lower on the Getaways. They are higher are priced, and it's just a different sector. But as far as the decline, I would say there was a bit of a decline, less than in local deals.

Great. And were you guys able to raise prices this year? I know you guys [typical did] in the first quarter.

On our core business?

Yes.

I would say -- I would characterize it as there weren't any significant price increases.

Okay. Well, thank you and good luck.

Thanks, Ed.

Great, thanks.

Thank you. I will turn back now to Mr. Loughlin.

Ladies and gentlemen, thank you for your time and your support. We look forward to speaking with you next quarter. Have a nice day. Thanks. Bye-bye.

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