Travelzoo (TZOO) 2013 Q4 法說會逐字稿

Good morning everyone and welcome to the Travelzoo fourth-quarter 2013 financial results conference call. (Operator Instructions). Today's call is being recorded.

Before introducing you to your hosts and beginning the Company's presentation, the Company would like to remind you that all statements made during this conference call and presented in the Company's slides that are not statements of historical fact constitute forward-looking statements and are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Actual results could vary materially from those contained in the forward-looking statements.

Factors that could cause actual results to differ materially from those in the forward-looking statements are described in the Company's Forms 10-K and 10-Q and other periodic filings with the SEC. Unless required by law, the Company undertakes 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 the Company's website for important information including the Company's 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 at Travelzoo investor relations website at www.Travelzoo.com/IR beginning approximately 90 minutes after the conclusion of the call.

Now it is my pleasure to turn the conference over to your host, Chris Loughlin, Travelzoo's Chief Executive Officer. Sir, you may begin.

Thank you, operator, and good morning and thank you for joining us today for Travelzoo's fourth-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. For the format of today's call I will review our fourth-quarter financial results and then Chris will provide an update on our strategy. Thereafter, we will open the call for a question-and-answer session.

Now please open our management presentation, 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. We achieved revenue of $37.5 million representing 1% year-over-year growth. Our earnings per share this quarter was $0.21 which is lower than prior year's earnings per share due primarily to increased taxes compared to prior period. In addition to a 4% year-over-year growth in subscribers, we continue to see increasing activity of our audience through mobile and social engagements.

Slide four highlights our revenue by segment. Revenue in North America was $25.6 million representing a year-over-year decline of 3% driven by weak results in our search revenue. In Europe, revenue was $11.9 million representing year-over-year growth of 12%. Europe revenue growth in local currency was 11%.

On slide five, the North America year-over-year revenue decrease of $800,000 was primarily due to a 28% decrease in search revenue driven by challenges in traffic acquisitions from search engines and poor monetization of our search products on mobile devices in addition to a decrease in local revenue driven by a lower take great.

We plan to take a strategic look at our future direction for search during Q1 which Chris will elaborate on later in our discussion today.

The declines in search and local were offset by a 7% increase in travel revenue due to increased advertising spend by certain vacation packages and cruises as well as continued growth in our Getaways for hotels.

On slide six, the Europe year-over-year revenue increase of $1.3 million was due primarily to an 18% year-over-year growth in our travel revenue driven by increased advertising spend by certain vacation packages, airlines and Getaways for hotels.

Slide seven provides some detail on our operating income and net income. We generated $4.5 million in overall operating income of which $2.7 million was from North America and the rest was from Europe. The European operating income represented 40% of the total operating income this quarter. Our taxes increased compared to prior year driven by a favorable tax benefit included in the prior year quarter of approximately $800,000.

Slide eight shows the cost of revenue and non-GAAP operating margin. The cost of revenue percentage increased due primarily to increased deal syndication expenses driven by higher volume of syndicated deals as well as the decline in Local Deals take rate. Our non-GAAP operating margin was impacted year-over-year by our continued investments however overall, the margin slightly improved year-over-year.

In addition, as a reminder in Q4 of last year we had not fully ramped up our development effort on our hotel booking platform. This investment alone represents 2 points of our margin.

Moving on to slide nine, this slide captures our operating expense by segment. Our North America operating expenses decreased year-over-year by $600,000 due primarily to our reduced search product traffic acquisition spend. We hold back on the spend if we see that the search spend will not result in a profit. This pullback in spend was one of the drivers to the reduced search revenue I mentioned earlier. North America expenses were relatively flat as a percentage of revenue.

Europe operating expenses increased by $300,000. However, as the percentage of revenue, they decreased given the strength in Europe revenue this quarter. We did not significantly increase our spend on subscriber acquisition marketing as we were balancing this goal with our other investment needs.

We expect increased operating expenses next quarter from increased marketing, professional and legal as well as continued development costs for our hotel booking platform.

Turning to slide 10, this shows that our headcount decreased this quarter by 12 full-time employees. We intentionally slowed down hiring and had some headcount reductions to help improve productivity. Note that the revenue per employee metric you see on this slide decreased year-over-year primarily due to our hotel booking platform related headcount additions over the last year because these heads are currently nonrevenue generating until we launch. This metric would have been relatively flat to prior year quarter without this investment. We expect this metric to improve as we monetize our hotel booking offering after launch. In addition, we will continue to closely monitor the sales force productivity.

Moving to slide 11, we continued to maintain solid collections and have maintained a substantial cash balance at $66.2 million. The business generated $10.5 million in adjusted operating cash flow. This cash flow is adjusted for the $12.3 million cash payment we made this quarter to settle a portion of the disputes over the unclaimed property which was accrued last quarter as part of that $22 million charge.

Overall our cash balance declined from last quarter as a result of both the $12.3 million unclaimed property settlement payment that I mentioned and $7.8 million of share repurchases.

As we near the end of our repurchases from the previously Board authorized 1 million share repurchase program, the Board has recently authorized an additional repurchase of 500,000 shares of the Company's outstanding shares to be executed from time to time in the open market which will be funded from available cash.

Turning to slide 12, in summary, we delivered solid growth in travel this quarter for both of our segments at an overall 11% year-over-year growth rate which was offset by lower search revenue. Our operating margin was slightly improved even with our continued product development investments. And lastly, we are maintaining our strong financial position with solid collections and no debt even after making large payments for our unclaimed property and executing on $7.8 million in share repurchases.

Looking forward to this next quarter, we expect the following. We expect search revenue to continue to decline. As we are reviewing our search products and working on their improvement, we will also put a stronger focus on profitability which could result in a revenue decline of approximately $1.5 million from our SuperSearch product versus the prior year period.

We expect local revenue will be seasonally lower. We expect to continue our investment in the hotel booking platform resulting in approximately $0.05 EPS impact, about $0.01 more than the impact in Q4. We expect to increase levels of professional, legal and increase levels of marketing cost related primarily to our subscriber acquisition spending in order to continue to drive audience growth.

Overall, we remain confident in our solid financial position and the investments we are making to drive long-term growth.

This concludes the financial summary of our fourth quarter of 2013. Chris now will provide an update on Travelzoo strategy.

Thank you, Glen, and hello everyone. Let me start on slide 14 by pointing out the key inputs into our business.

On the X-axis, you can see that we are growing our audience and on the Y-axis there, you can see that we are increasing our 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 to our mobile apps. We are also focused on further engaging our existing audience.

Second, we are investing in product development. We are reengineering our products to allow our users to search easily for what they need, where they need it and when they need to go and our focus is primarily on mobile and hotels.

Let's turn to the next slide 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. We added 1.8 million net new email subscribers in 2013. Net new subscribers are new subscribers net of unsubscribes. We believe that by growing our audience further we can continue to grow our revenue as shown in the bottom left of this slide.

In addition to email subscribers, we are focused on building our mobile and social audiences. We ended the quarter with 2.4 million app installs, 1.9 million fans across Facebook and Twitter. Mobile including smartphones and tablet now accounts for approximately 40% of our traffic and over 1 million people are accessing our brand every week through mobile devices.

On slide 16, I would like to highlight our second strategic element, through product development, we are expanding our relationships with our subscribers and suppliers and over time we believe that this increases our business opportunity. In 2013, we ramped up our product development investment. We are focused on making it easier for our subscribers to find what they need. In Q4, we began to deliver product enhancements that address this objective.

Our new website offers larger photos, localized homepages and site search across the site. We see lower bounce rates, stronger conversions and more users are searching for our deals. Our mobile apps and website -- the mobile website that is -- improved with the launch of version 2.0 with better photography, faster location detection, search and filters. Our mobile conversion metrics are improving as a result of these efforts.

We completed test of a photo edition of the top 20 in France and Spain and Southern California. We now plan to offer a photo edition more widely. We see higher engagement rates in photo edition especially on mobile.

We rolled out basic reviews on web and mobile. We've now have over 400,000 subscriber reviews that are powering the thumbs up that you see across the website.

We also deployed Deals on Maps across all of our product. A subscriber living in New York can now zoom into cities like London, Paris and Sydney and see locally sourced restaurants, bar and hotel deals in addition to the US packages that they have always been able to see. You can catch a glimpse of this on slide 17. It really does make for quite a picture and demonstrates just how extensive our coverage is of deals around the world.

Our Fly.com mobile product had its first full quarter in Q4, we processed 0.75 million search queries in the quarter on little or no promotion. While this was very encouraging, monetization lagged behind desktop.

In 2014, we will focus our product development energy on our hotel booking engine first and foremost. We will also make our deals [stay] searchable, enhance our reviews and deploy products that drive further engagement. I'll discussed search and the rollout of the hotel platform in the next slide.

So let's get to slide 18 to discuss search. As previously disclosed, we saw a decline in search revenue in the fourth quarter as search products were affected by a recent trend. It has become more competitive and less cost-effective to acquire traffic from search engines. Users are moving to mobile. We do not operate SuperSearch on mobile and we do not yet have apps for Fly.com.

We also are finding that the Fly.com mobile site -- that mobile monetization lags behind desktop. Airfare cost per click pricing is deteriorating while hotel cost per click pricing is appreciating and our current search products focus mainly on airfare.

We have initiated a performance review of search and will analyze our various options. This may include repositioning, consolidating or terminating certain products. During the performance review, as Glen pointed out, we will run these products for profit and this will result in a year-on-year decline in search primarily from SuperSearch for approximately $1.5 million in the first quarter.

While I'm obviously disappointed in the Q4 search results, I'm also excited about the future possibilities for search at Travelzoo. I look forward to partnering with our new executives, Eddie Garcia, a search product expert from eBay, and David White, a search marketing expert from Yahoo! and Efficient Frontier to help build out our future strategy.

Turning on to slide 19, I would like to update you on our new hotel booking platform. We spent the last year developing and integrating the new booking platform. I'm pleased to say that our employees are now using the system to make their own hotel bookings. This allows us to test the [UX] and guest experience. We plan to start consumer bookings later this quarter.

I recently made my first booking on the new platform. I stayed at the Gramercy Park Hotel in New York and the experience was seamless. I was happy to note that the Gramercy Park Hotel is a new supplier. Over the past 15 years they did not promote a single deal with Travelzoo and now thanks to the booking platform, Travelzoo subscribers will be able to check into their hotel any night of the year.

We expect continued impact on our expenses in the first quarter and no significant revenue from this new product. Please note when consumers book through our new product, revenue will be recognized upon check-in, not upon booking.

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

Concluding on slide 21, our areas of focus for 2013 are most and foremost we plan to maintain our quality leadership position by publishing high-quality deals and offering high-quality product while tightening our brand control. We intend to reaccelerate our long-term revenues by investing in audience growth, engagement across email, social and most importantly, mobile. We are also introducing products that simplify and improve our business particularly online booking capability of hotels and in our mobile products.

Lastly, we plan to invest for future growth while remaining profitable.

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

(Operator Instructions). Ed Woo, Ascendiant.

Thank you for taking my question. The first question I have is how much of the strength that you had in your core travel was due to the travel industry and do you see any possible changes heading into the next -- this current year?

Good morning and thank you. We did see a pickup in the UK in general. The economy is obviously turning around so that was helpful but the primary driver here is that we have got a year of experience in our Getaways product. We also have some sales folks really working at full speed now and you saw in the last year we did ramp that salesforce. In the more recent quarter you saw headcount come down as we start to optimize the organization.

So I think it is more on the effectiveness of the sales organization but certainly there is some benefit from the economy.

Great. You mentioned that competition was increasing for search business. Do you see it also increasing rapidly for your core travel as well or do you think the overall pie is just increasing as well?

The competition for keyword clicks is what I was referring to there and as you see, Google and other search engines are introducing their own products for keyword search for FF search and that then pushes our results down the page. Also there are other players in the market who are bidding up to capture more traffic. Whether they are profitable in those campaigns I do not know but we are finding the prices on some of those clicks are now becoming too expensive.

You mentioned that you are doing a strategic review of your search business which includes SuperSearch and Fly and one of it is possibly merging or getting out of the business entirely. Will a decision be made do you think in this quarter to do that or do you think this will probably be something that you may evaluate over the course of the year?

We would like to conclude the evaluation this quarter but if it takes us a little bit longer we will take our time and make the most prudent decision but ideally we would like to conclude this quarter.

Great. Last question I have is on your Local Deals business. You mentioned that the take rates have gone down. Is this something that you foresee continuing over the next course of the year and do you think that there is a chance that you could see some stabilization as some of the competitors seem to be pulling back in this market?

I will answer a bit of the question and then I will ask Glen for some comment on this one, Ed. I would like to point out that we are aiming for higher quality merchants than most of the market. This last quarter we were the only brand out there that was running a nationwide deal at the Four Seasons Hotel spas and in order to capture that content, we were interested in being more flexible. What we did see just in general with vouchers, we saw more returning buyers than ever before in the quarter. We also saw a record number of unique purchases.

So on the consumer side, we are quite pleased. Obviously the take rate is coming down.

Glen, would you like to comment on what your prognosis is for the future of the take rate?

Yes, the take rate, I think the decline is probably representative of what we would be doing in the future just because like Chris said, we are kind of resetting to make sure that we are competitive in the marketplace as well as getting the deals that we want on a national basis and the merchants that are preferable.

So what we saw was that on average this quarter year over year, it is down by 3 percentage points and I don't know where that completely stabilizes but that is a pretty large drop from last year so we feel good about the deals, that that is striking a good balance between the merchants and us.

Great. Thank you and good luck.

Dan Kurnos, Benchmark Company.

Great. Thank you. Good morning. Chris, let's start from the top here on travel. Just a quick question. North America had a pretty big deceleration in the growth rate. Just wondering if there were competition issues there although your overall travel was better, you called out the UK. I would love to hear an update on how the progress on the mobile front is going from a travel perspective?

I think we felt pretty good about the results there in North America on a year-on-year basis. It is still one of our strongest quarters historically over the last few years and of course, Europe we are delighted with that performance in Europe travel.

The travel business in general is doing well for the reasons we mentioned that we are seeing a pickup in the economy, we are seeing that our sales team is now being vet in and is optimizing and we know that our subscribers have something on the Getaway side. They have purchased these getaways, they've been out, they've have experienced it and the repeat rate on vouchers in general is increasing so that is positive.

On the mobile side, I think we have made really tremendous progress certainly in the last three months. The apps are much more stable, location pickup is much faster. The conversion rates are stronger and the images are now much bigger as well. So I think we are really pleased about that.

The mapping tools and the filtering tools particularly in the apps help the users find what they need. We want to get to a point where you have this sort of concept in the app where you can simply find what you need where you need it and when you need it and the concept is very simple. For example, here I am in New York and I want to have lunch this afternoon at some of the great restaurants that we work with. That is sort of a vision. Or I want a hotel tonight or next week. At the moment, we publish deals in an email format and these have headlines that don't necessarily have indexable searchable data so there is a lot of backend work going on to enable that vision. I think we are getting pretty close to it now particularly in the hotel category and I think that is going to be pretty exciting for all of us.

Thanks for that color. Glen, a quick question. Would you be willing to share what the Getaway's growth rate was in the quarter or at least some color around that?

Sure, still pleased with the growth. It is really still being accepted in the market so it is over 40% growth overall with higher growth rates in Europe relative to North America.

Great. Thanks for that. Chris, on the local side just to maybe follow up a little bit on Ed, there was actually a little bit of upside here. I know you guys have been calling for more flattish Q over Q but you had it looks like a better quarter I think than expected on Local. What is driving that business? Is emergent optimization, is it repeat business? Have you seen an increase in repeat business or is the site benefiting? Maybe some more color there would be helpful.

The one thing which we did launch in the quarter was a new gifting product and that certainly helped drive conversions. We also benefit from the seasonal effect of that particular business. We saw that come through very clearly in the UK where folks were buying these vouchers as gifts and we also produce now a physical gift you can send to your friend and put it under the Christmas tree or wherever you like.

So that is really sort of an enhancement of that product and through the mobile apps, it is now much easier to find the deal we need. We didn't have filtering in the apps before. Now you can say I want New York and I want a restaurant. That is really helping drive conversion. I would like to get that down to meal type so I'm in New York and I want lunch. That is sort of a future vision of where we are at but some of those -- the gifting and the mobile certainly helped drive performance.

So combining all of that, when do you think we might see a return to growth in Local overall and how sustainable would that growth be?

I don't think I have got that answer for you, timeline but we are working on it and I think the key to the answer is getting the flexibility and data structure right particularly for mobile and we are working on it. And if you bring up the app right now, you will see things that we are testing that we think will drive future growth.

Okay, fair enough. Turning to search, I just want to get a sense here, you have said in the past that search was sort of a key driver of traffic which is why you kept it as a business. Has your perception of that changed or is it really just the competition and the landscape is sort of forcing you to make this decision?

Dan, I have been here in this role almost for four years now and one thing I can say is that we didn't invest heavily in innovation and search and the market did. We invested in our Local Deals, Getaways and are core travel products and also bringing that European business up. I'm pretty excited about the prospect of innovating now into search. Now that we will have date structure information for our deals, we will be able to pull those into the results so I certainly see that there is a future for Travelzoo in search.

I was quite pleased with the Fly.com consumer side results. Immediately we saw hundreds of thousands of people using the mobile website for Fly.com. Of course if you don't have a search product on mobile and we don't have a Fly.com apps at this time, we're not going to benefit from that traffic shift so I think there is certainly more to come and we are looking forward to this review, it is long overdue.

Great. On the expense side of the ball, I guess a couple of questions. You guys have sort of I guess -- underperformed is the right way but you come well short of your expense forecasts the past couple of quarters now. I know search has been a driver of that. You also reduced headcount. How should we think about investment beyond what you have given in terms of the hotel platform? When do you start investing in subscriber growth and are you going to start ramping headcount again as the hotel booking platform comes online? Some color there would be really helpful. Thanks.

From headcount, we don't have current plans to ramp. We have got much of the team in place. We will leverage the same sales and marketing and product teams that we have already. We may extend customer service as volume picks up.

Glen, do you want to pick up the rest of the question? I'm not sure there is really much more information there.

I think some of the fluctuations, Dan, that you see in the past and especially in the marketing line have been primarily due to the search business where we've talked about where -- if we can't spend it profitably, we just don't spend it, right? And so the revenue line is kind of an indicator of it. But as far as the subscriber acquisition, we do kind of monitor that on a quarter-by- quarter basis and if revenues -- we are worried about revenues not coming in, we are not going to spend as aggressively and if they are coming in stronger and as we expect, then we will continue to spend there. So it is kind of a balancing act with that marketing spend.

Great. Thanks, Glen. On the hotel platform side just a quick question. When do you guys actually think that will be beneficial, marginally beneficial to the P&L? I know you are still investing in the launch. I think you had said previously was slated for maybe Q4 of this year or back half of this year?

We are testing internally with our employees right now as I said, I stayed last night at a hotel that I booked through the platform and we expect to take consumer bookings starting this quarter. The revenue will then start to hit us as folks check in. They will be minimal this quarter and it will start to then climb up in Q2 and Q3.

Great, that is very helpful. One last question on the uses of cash. Do you think that you might make any acquisitions to sort of fill in some of the tech gaps that you guys are having right now or to maybe modernize your platforms? I know typically you have built out organically although you did make a small acquisition to launch the hotel platform? Do you think you are going to continue to stockpile cash and just maybe use some of the money to repurchase those shares?

Obviously, yes, we just announced the repurchase program and we will continue to review any deals that fit the strategy. So far we haven't found deals that are priced appropriately that fit with our objectives. So nothing planned. The repurchase is now out there and we are pleased to do that.

All right, great. Thanks for all of the color, guys.

At this time, I would like to turn the conference back to Mr. Loughlin for any closing comments.

Ladies and gentlemen, thank you for your time on the call. We look forward to speaking with you again next quarter. 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 pleasant day.