Travelzoo (TZOO) 2013 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Travelzoo second-quarter 2013 financial results conference call. At this time all participants have been placed in a listen-only mode and the floor will 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 second=quarter 2013 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 through today's format.

Thank you, Chris, and good morning, everyone. Thank you for joining us. 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. Unless required by law we undertake no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

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 conclusion of this call.

For today's format, I will review our second-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 3 provides the key financial highlights for the quarter. We achieved revenue of $41.3 million this quarter representing 5% year-over-year growth. Our earnings per share this quarter was $0.34, which is lower than prior years due to our investments in salesforce expansion, marketing and our hotel booking platform. In addition, we saw growth in new subscribers.

Slide 4 highlights our revenue by segment. Revenue in North America was $30.2 million representing a year-over-year growth of 5%. In Europe revenue was $11.1 million representing year-over-year growth of 4%. Local currency Europe revenue growth was 7%.

On slide 5 the North America year-over-year revenue increase of $1.5 million was driven by the increase in our travel revenue due to increased spend by certain vacation packages and cruises, as well as continued growth in our Getaway voucher offering for hotels. This was offset by a decline in local revenue from reduced number of vouchers sold per deal compared to the prior year period.

On slide 6 the Europe year-over-year revenue increase of $500,000 was due primarily to our travel revenue driven by increased spend by certain vacation packages, cruises and getaways for hotels. This growth was offset by some decrease in our search revenue driven by reduced spending.

Slide 7 provides some detail on our operating income and net income. We generated $7.8 million in overall operating income of which $1.9 million was from Europe and the rest was from North America. Our investments in expanding our salesforce, increasing our 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. In addition, our tax rate increased compared to prior year as we are now providing for taxes on our European income.

Slide 8 shows the cost of revenue and operating margin. The cost of revenue as a percentage of revenue increased due to certain customer service investments we are making in advance of our hotel booking platform, as well as increase deal syndication expenses from the increase in the relative volume of syndicated deals. Our operating margin was impacted year-over-year by our continued investments.

Slide 9 captures our operating expenses. Our North America operating expenses increased year-over-year by $3.1 million primarily due to a $2.3 million increase from our headcount-related investments and another $800,000 primarily due to the incremental search marketing costs. Europe operating expenses increased due to our investments as well.

We did not significantly increase our spend on subscriber marketing because we were balancing this need with the need to invest in other areas. We expect increased operating expenses next quarter from the continued ramp-up of headcount costs, increased marketing, legal and professional fees and increasing development costs for our hotel booking platform.

Turning to slide 10, this shows that our headcount increased by a net 19 full-time employees this quarter from 425 to 444. We have continued to add salesforce for hotels and Local Deals. In addition, we've added production employees to support the higher volume and have added employees to support our strategic initiatives in both marketing and product development. We continue to closely monitor the productivity of the salesforce and believe these additions are helping to support our strategic initiatives.

Moving to slide 11, we are maintaining solid collections and growing our cash balance. We ended the quarter with $73.4 million in cash and cash equivalents, up from prior quarter as a result of our operating cash flow of $10 million.

Turning to slide 12, in summary we delivered solid revenue this quarter and increasing profitability year-over-year in both of our segments. And although our operating income continues to be impacted by our investments, we do believe these investments will drive future growth. We are also maintaining our strong financial position with positive cash flow, growing cash and no debt.

As a reminder, the second half of our fiscal year, which we are now entering, has historically been seasonably slower. Looking forward to this next quarter, our third quarter of our fiscal year, we expect the following. For revenues we expect sequential declines in our local revenue similar to last year's third quarter due to seasonality. We also expect our travel business to be at relatively similar year-over-year growth rates as this last quarter, Q2 2013.

For expenses we expect the following -- cost of revenues are expected to increase approximately 50 basis points compared to Q2 2013 due to increasingly syndicated deals and seasonally lower revenue.

For sales and marketing we expect a sequential increase compared to Q2 2013 of approximately $500,000 given our goal is to invest in our audience. This is less than half the sequential increase than we experienced last year. For our hotel booking platform investment we expect a sequential increase in expense compared to Q2 2013 of approximately $300,000.

And lastly, for various reasons we did not end up incurring the full previously expected increased legal and professional expenses that were estimated at $0.04 of EPS in this quarter, Q2 2013. Yet we currently expect to incur these expenses by the end of the year. Again, we ended the first half of the year with solid results and remain confident that, even with our historically slower second half, we are in a good position to continue to invest in our future.

That concludes the financial summary of our second-quarter 2013; Chris will now provide an update on Travelzoo's growth strategy.

Thank you, Glen, and hello, everyone. For those who are new to the Travelzoo story, the chart on the left on slide 14 outlines how our business grows. On the x-axis you can see we are growing our audience; on the y-axis we are increasing the revenue per subscriber over time.

Our current investment strategy falls into two areas. First, we are investing in audience growth, not just by expanding our traditional email subscriber base, but increasingly we are adding Facebook fans, Twitter followers and downloads of our iPhone and Android apps. And second, we are investing in product development. We are focused on improving our engagement and conversion levels through better visual presentation and simplified ease-of-use. We're also expanding our product portfolio to include full products such as a hotel booking platform. Let's turn to the next slides to review how we are doing.

On slide 15 you can see that over time audience growth has been a key driver of revenue growth. So far this year we have welcomed 1.5 million net new subscribers. And while we are pleased with progress, we invested less in marketing then we would have liked as we balanced the need with our need to invest in salesforce ramp-up, search marketing and new product development.

In addition to growing the absolute number of subscribers we are very focused on further engaging our existing subscribers. This quarter more subscribers engaged with our brand than in any prior quarter. We also saw more returning subscribers buying our Local Deals and Getaways than in any prior quarter.

These improvements in audience engagement stem from better targeting through customer segmentation, better visual presentation, improved photography, improved service levels and expansion of our brand across social and mobile. The continued high-quality nature of the deals we publish also remains a key driver of audience engagement.

Slide 16 highlights our progress with mobile and social where we continue to make impressive progress. Approximately 2 million people have now downloaded our iPhone and Android apps and we ended the quarter with approximately 1.5 million combined Facebook fans and Twitter followers. During the quarter we saw a record number of visits from social media. We are ranked one of the most visited travel brands on Facebook.

Turning to slide 17 let's look at our second strategic element, investing in product development. The dominant trend in our industries, travel, entertainment and local, is that users are engaging increasingly via mobile. In the second quarter our mobile visits were 40% of total traffic, up 5 points from the prior quarter.

While our content is perfectly suited for mobile our data structures and booking capabilities are limiting our ability to service our subscribers as well as we would like. For example, if a subscriber came and pulled up our mobile app to find a hotel deal this weekend in New York, which undoubtedly we have, it could take several minutes to find the deal and several more minutes to book the hotel on the hotel's website. For every booking the subscriber would have to reenter his details.

This limitation stems from the fact that we were designed as an email publisher. With the advent of mobile we see greater urgency to fix these usability challenges. To solve this problem we're developing a hotel booking platform and the platform will allow users to quickly and easily book hotel nights within Travelzoo's websites and mobile products and make it easy for hotels to load rates.

Turning to slide 18, the introduction of the hotel booking platform highlights the evolution of our brand. Travelzoo started 15 years ago as a pioneer of travel deal alerts, emailing our subscribers when we learned of a great deal. Because email was our primary form of communication we didn't focus on the product development of our websites and mobile products. Indeed, we saw these as repositories for our push deals.

Today Travelzoo's websites and mobile products attract millions of subscribers each month who come directly to us to book travel because they trust us. We need to evolve these products to better service our subscribers.

The chart on the right of this slide shows how our Local Deals business is already benefiting from this pull behavior where 21% of our Local Deals revenue in Q2 was a direct result of subscribers simply coming to our websites and pulling of our mobile apps. They didn't wait for an email to be pushed to them.

Slide 19 lays out our timeline for the development and rollout of our hotel booking platform capability. The new product will take some time and investment and we estimate our investment in the platform will be approximately $1.2 million this quarter with no immediate revenue benefit. This is an incremental $300,000 compared to last quarter, as Glen pointed out in his highlights.

In addition to the actual booking engine we will have to overhaul our content and integrate with our existing systems. We will be prudent and balanced with the need to change -- with the fact that we have a very profitable and robust model in place already. We made good progress this quarter including continued testing on the Perfect Escapes website and contracting hotels; we've also been preparing our customer service capabilities.

Turning to slide 20, I want to remind you that quality underpins everything that we do. Quality experiences drive repeat and referral behavior making our brand thrive in the long run. Since the beginning for us it has been about quality and it will be into the future.

Concluding on 21, our areas of focus for 2013 are -- first and foremost, we plan to maintain our quality leadership position publishing high-quality deals and tightening our brand control. We want to re-accelerate top-line long-term revenues by investing in audience growth and engagement across email, social and mobile, products that simplify and improve our business, particularly online booking capability for hotels and our mobile products. And lastly, we plan to invest in the 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.

(Operator Instructions). Ed Woo.

Yes, thank you. Glen, I had a question. You went through some of the numbers on the expenses really quickly. Can you go over that really quickly (technical difficulty)?

You want me to recap that?

Yes.

Okay, great, great. Yes, so, for the expenses on the cost of revenue and when we described the flux this quarter, those went up a bit as a percentage of revenue. So we would expect a 50 basis point increase compared to Q2 due to just the increasing mix of the syndicated deals.

So part of our marketing effort is to use our network and syndicate deals and that comes with a bit of a cost to doing that. We don't have any incremental selling costs but we have to pay some cost to that network to distribute those deals. So that will be part of the cost of revenue this coming quarter as well. And then just for that fixed component of -- quasi-fixed component of the cost of revenue, seasonally we have lower revenue so the percentage goes up a bit.

On the sales and marketing, we are expecting an increase compared to this last quarter of about $500,000 because our goal is to invest in our audience. Obviously we held back this last quarter a bit just because we had a lot of things going on, other investments and potential increase in other costs and we were trying to balance that with our profitability goal. So we feel like we need to catch up a bit on the subscriber spend in particular. And that increase, when you look at it, is less than that the sequential increase that we had last year, Q2 to Q3.

And then the final highlight was the hotel booking, we've got another $300,000 incremental this quarter Q3 compared to the Q2 that we were expecting. And then the highlight from what we said last quarter was we were expecting some increased legal and professional fees of approximately an impact of $0.04 on EPS and that didn't fully come to fruition. Most of that didn't happen this quarter. We are still expecting it, but what I can say is we will probably incur that before the year wraps up. Does that help, Ed?

Yes, thank you, that is very clear. Thank you for the details. Then I had a question. It looks like your Local Deals were up quarter over quarter overall but down a little bit year over year. Do you think that is going to be a trend that is going to continue? And also it looked like your take rate has gone down, was it noticeably down and do you think it has anything to do with competition?

Yes, a couple of things. Chris, do you want to take this one or do you want me to --?

No, no, no, go ahead. Absolutely go ahead.

Okay. Yes, a couple things on that. One trend that we had mentioned before is the trend year over year has definitely been we are selling less vouchers per deal. So that trend is definitely impacting us year over year. I mean, we are definitely pleased with the sequential increase and the production of the deal. So we have got more deals coming out; we feel really good about the quality of the deals.

The take rate that you are seeing year over year, it has, like I mentioned last quarter, come down a couple points. That is a combination of things. One, just selective lowering for the deals that we want and quality deals. So call that competition, call that we want to make sure we are getting the quality deals in the mix. But the other part of it is this thing Chris was mentioning was this -- these extended period deals that are on our site have somewhat of an impact on that as well.

Ed, there is quite a few deals that we didn't email out. I mean the one thing you have to do in the mobile world is you just to have good coverage. So we have many deals there that don't necessarily fit email, but they are very useful in the mobile environment.

Do you anticipate that being possibly a change in strategy a little bit in terms of having more deals that aren't simply pushed out to your subscribers having more of kind of like a deal bank carry over for people to go and actively look for? Or do you think that you will still continue to focus on email marketing?

I think in the future or even now we are certainly seeing Travelzoo becoming an established, trusted brand. That's the -- sort of the underlying ingredient. And we are seeing millions of people come to our website who are just looking to do things or bring up our apps, they're looking to do things, they are not waiting for the email to come. And the business -- the business in general is becoming a push/pull whereas I think when you first started covering us we were a company that primarily sent out emails.

So, yes, we will have more deals available all of the time, not just in Local Deals, but also in hotels. We will make the deals more searchable. If you actually go to what we call the category levels or the city level you can see now you can search by spa, restaurant and so forth. We are trying to make the experience much easier for the subscriber and we will start to push those usability improvements into mobile as well.

Great. And the last question I have is how is the overall travel market and how much of that has beneficially helped you? Because obviously it looks like your core travel business continued to be strong in this quarter.

Overall the market is quite strong. And there's I think some quiet confidence. When I was speaking with hotels or airlines they were talking about the next 18 months and I things are certainly picking up. In Europe the story is a little different, the economy continues to drag although the Northerners -- the Northern Europeans are consuming the beds in the southern countries and that is helping the tourism industry.

But the audience side -- on the audience side in the southern countries it is not robust at all. So that's what is happening. And I think everyone feels quietly confident. But I wouldn't say that we are -- [I would say] it is rather quiet confidence than high-fives at this point.

All right, well, thank you and good luck.

Dan Kurnos, The Benchmark Company.

Just wanted to get a little bit more into the subscriber side first. I think you have made it pretty clear now that you are a little disappointed with the subscriber growth but that you were balancing your expenses for profitability. And you have talked about re-accelerating that growth, although to less of an extent that you witnessed last year sequentially.

So my question to you is are you seeing marketing efficiencies? Most of the OTA space right now is being forced into more premium paid channels and we are seeing negative efficiencies and marketing spend. So are you guys seeing something different or are you pushing different channels that you think can still ramp growth without having to spend too extensively?

Hi, Dan. We think we have got quite a lot of headroom there. It was an intentional pullback on our part. The Company likes to remain profitable and we just pull back a little bit on the marketing. Honestly we were -- on the marketing team side we were focused on the social and also the engagement levels. We were pretty delighted with our engagement levels across the board in every country actually. And we are very, very pleased with our friends and social media.

I mean, we have really come from nowhere to being one of the leading brands in social media in travel in the last 18 months. So I think we have got a lot of headroom to spend to get email subscribers, but the world is changing. We are doing a great job in social and we are doing a pretty good job in mobile. And you are going to see a balanced approach across those three platforms going forward.

Got it, great. And then turning to the travel side of the business maybe just quickly to touch a little bit more -- or delve a little bit more into Ed's question. We did see last night that eBay noticed some moderating e-commerce growth rates actually in the UK and Germany. And your international -- your European travel growth was a little bit lower than we were expecting, but overall we haven't seen any declines in the travel side from a macro perspective internationally within Europe yet. Do you see that filtering through into the back half of the year or are you still going with the -- we are still cautiously optimistic?

I mean, look, we are in four markets. In France and Spain it's certainly challenging, it is more on the audience side and we are publishing deals at hotels in those countries and other markets and still seeing a strong response. So I am not optimistic on the outcome there.

In Germany we are in quite an interesting position. It's not as competitive now in Germany as it was in the daily deal boom; a lot of those businesses have gone. We have a very strong team there. So I would say I am cautiously optimistic there. In the UK I remain cautiously optimistic, although perhaps less optimistic than Germany because the competitive environment is very, very intense. So hopefully that gives you sort of a flavor on how we feel about it.

Yes, that is very helpful. And then I noticed in the presentation that you guys didn't break out Getaways' growth this quarter. Do you have that number?

I don't think we have broken that out. Oh, yes, we did break that out last quarter. Glen, do you have --?

We did, yes, it was approximately 30% overall.

Great, thanks. And then, Chris, you did mention this, you and I have talked about this a lot. With regard to the website I did notice some of the minor changes we've seen on the daily deal side with breaking out by category, I think that is a good improvement. Could you give us a sense of the timeframe for when we might see a bigger overhaul or what your thinking is about that revamping the website?

Yes, I mean just the products in general. First off, I would encourage you to look at the new fly.com website. We did finish that overhaul, it looks fantastic. And also use the mobile app -- it's not a mobile app, sorry, the mobile website for fly.com, that got launched this quarter. It looks really great and, more importantly, it functions well.

On the Travelzoo side the biggest undertaking was moving to these 2x1 image formats and that is now done. You see below the homepage that the whole site is pretty much done already. The homepage is the remaining piece of the puzzle and we are working on that homepage.

You may not know it, but the homepage is localized for your city, it has been for some time. So, in addition to visual changes there are technical changes that have improved the experience and these things are leading to higher engagement levels. Obviously if a guy coming to the homepage is sitting in San Francisco, sees deals that are related to San Francisco, he is more likely to be engaged in seeing nationalized deals. And so those went live.

I would sincerely hope that we get the new homepage live this quarter, but it's really just a case of you don't want to make the change unless it is perfect. And we are quite picky, as you know. So once it is ready to go we will get it out, but we are not going to put a date on that. We just want it to be really good.

Got it, great, thanks. And just maybe two quick questions for Glen on the expense side. I know that you called out the legal expense I am assuming that is why G&A had some efficiencies there. You actually had some leverage in G&A year over year, which is a little bit surprising. You guys had the headcount ramp so would it be fair to assume that either the legal expense plus the headcount ramp should tick out G&A going forward and how should we think about just the timing of that legal expense over the next -- over the balance of the year?

Yes, I will be honest, the timing, we were a bit off on that because we were expecting it this last quarter, right. So I can't really say much on the timing besides my expectation right now is before the year runs out we will incur most of that expense that I talked about.

But on the -- on your question on what G&A does, yes, I think it goes up from this last quarter. Some of that is just from the hotel booking platform investment, but some of it is just naturally -- if you look at last year's Q2 to Q3, we just naturally have some consulting and audit tax and compliance work happening in the second half of the year that doesn't happen in the first half. And so we have to take the expense in those periods. So you will see it tick up a bit.

Okay, and then just the second part of the question, just to maybe delve a little bit deeper into the net headcount add. Just curious if you would be willing to break out how much of the net adds were hotel platform versus deals versus just generic travel?

Yes, I would say probably over half of it is the salesforce and the hotel and Local Deals. And then the remainder I would say -- I think about half of that is hotels.

Got it, great. Thank you both very much.

Okay, I will turn back now to Mr. Loughlin.

Thank you, operator. Ladies and gentlemen, thank you very much for your time and we wish you a very good day. Goodbye.

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