Travelzoo (TZOO) 2014 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Travelzoo first-quarter 2014 financial results conference call. At this time all participants have been placed on listen-only mode, and the floor will be open for questions following the presentation. Today's call is being recorded.

Before introducing your host for -- and beginning the Company's presentation, the Company would like to remind you that the statements made during the conference call and presentation in accompanying slides 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 may vary differently from the -- continued 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 in information, future events or otherwise.

Please note that this call is being webcast for 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 the conference call will be available at the Travelzoo investor's Investor Relations website at www.Travelzoo.com/IR beginning approximately 90 minutes after the conclusion of this call. Now it is 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 first-quarter 2014 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. 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 which is available at www.Travelzoo.com/earnings to follow along with our prepared remarks.

Slide 3 provides the key financial highlights for the quarter. Our revenue in the quarter is $40.2 million, down 5% year-over-year due to Search and Local revenue. Our earnings per share this quarter was $0.31, which is lower than the prior year period earnings per share due primarily to lower revenue, the higher effective tax rate and investments in our hotel booking platform. Our subscribers grew 3% year-over-year along with continuing mobile app downloads.

Slide 4 highlights our revenue by segment. Revenue in North America was $26.4 million representing a year-over-year decline of 12%. In Europe revenue was $13.8 million representing year-over-year growth of 13%. Europe revenue growth in local currency was 6%.

The next two slides cover further detail of our North America and Europe segments.

On slide 5 North America year-over-year revenue decreased by $3.5 million, half of which was due to a planned reduction of Search marketing spend and the other half was due to lower voucher sales. Our travel revenue was impacted by lower voucher sales for Getaways as well as lower spend by some advertisers including certain online booking engines and selected international airlines. We believe our North America Local and Getaway revenue may have been impacted by the severe weather during this quarter.

On slide 6 the Europe year-over-year revenue increase of $1.5 million was due primarily to a 20% year-over-year growth in our Travel revenue driven by increased advertising by travel agencies, booking engines and vacation packagers as well as continued growth in Getaways revenue. This was partially offset by a decline of 400,000 in Europe Local revenue, a portion of which was seasonally driven.

Slide 7 provides some details on our operating income and net income. We generated $7 million in overall operating income of which $4.6 million was from North America and the rest was from Europe. Our taxes remained flat in dollar terms compared to prior year; however, the tax rate did increase and it was driven by the fact that we no longer have accumulated operating losses from Europe's start-up years to offset our current European income. Net income for this quarter was $4.6 million versus $5.6 million prior year.

Slide 8 shows the cost of revenue and operating margin. The cost of revenue as a percent of revenue increased year-over-year primarily due to increased deal syndication expenses driven by the higher volume of syndicated deals on websites like LA Times and Chicago Tribune.

In addition, there were certain step costs in customer service as well as certain customer refunds related to our German Local Deals. Our operating margin increased quarter over quarter due to seasonality and was impacted year-over-year by lower revenue and our continued investment in our hotel bookings platform.

Moving on to slide 9, North America operating expenses decreased year-over-year by $3 million due primarily to a planned reduction of our Search marketing spend as well as lower earned commissions and bonuses. Europe operating expenses increased by $900,000; however, they decreased as a percentage of revenue given the strength in Europe's revenue this quarter.

We did not significantly increase our subscriber acquisition marketing spend compared to prior year. We expect increased operating expenses next quarter from increased marketing and professional costs and continue development costs for our hotel booking platform.

Turning to slide 10, this shows that our headcount increased this quarter by eight full-time employees in Europe. We plan to remain cautious on hiring and remain focused on maintaining and over time improving productivity.

Moving to slide 11, we continue to maintain solid collections, we have maintained our positive operating cash flow and we have a substantial cash balance of $61 million. This cash balance did decline from last quarter as a result of stock repurchases of $5.6 million as well as an additional unclaimed property settlement payment of $1.2 million.

Turning to slide 12, in summary we delivered solid growth in our European Travel revenue of 20% which was offset primarily by lower North America revenue in Search and Local. In addition, we are maintaining our strong financial position with the solid collections and no debt while continuing stock repurchases.

Looking forward to next quarter we expect the following -- we expect Search revenue to continue to decline by approximately 1.5 million to $2 million versus prior-year period, this is driven by our planned reduction in Search marketing spend focused on improving profitability. We expect Getaways to be seasonally slower; we expect to continue our investment in hotel booking platforms which will result in an approximate 5% or $0.05 EPS impact, about a penny more than Q1.

In addition, we expect to incur increased levels of special costs for various initiatives as well as increased levels of marketing cost. Overall, we remain confident in our solid financial position and product investments that we are making to enhance the experience of our subscribers and the results for our advertisers.

This concludes the financial summary of our first-quarter 2014. Chris now will provide an update on Travelzoo's 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 in the Y-axis we are increasing our revenue per subscriber over time.

Our current investment strategy falls into two areas -- first, we are investing in our audience growth, not just by expanding our traditional email customer base, but increasingly we are adding Facebook fans, Twitter followers and downloads to our mobile apps. We're also focused on further engaging our existing audience.

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

So 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 our revenue growth. We added 823,000 net new email subscribers during the quarter. That is net of [unsubscribed]. We believe that by growing our audience further we can continue to grow our revenue as shown on the bottom left of the slide.

In addition to email subscribers we are focused on building our mobile and social audiences. We ended the quarter with over 3 million app installs; we saw a record number of new installs this quarter. We also have over 2 million fans across Facebook and Twitter. Mobile, including smart phones and tablet users, is 40% of our traffic. Over 1 million people are now accessing our brand every week through a mobile device.

Turning to slide 16 I would like to highlight our second strategic element. Through product development we're expanding our relationship with subscribers and suppliers and over time this increases our business opportunity. Last quarter we announced that we would begin a performance review of our Search product. On the left you can see why.

Since 2011 our Search revenue has been in decline. Recent trends affecting Search include a more challenging traffic buying environment, the move to mobile where we currently [cannot] offer our SuperSearch product and deteriorating economics in flight.

In Q1, David White, who joined us from Yahoo!, began a performance review of Search and is developing a growth strategy that addresses the changing market dynamics. Our review is still in progress but we can already confirm that Search will remain an integral part of our strategy going forward.

In addition to delivering revenue and profit Search drives subscriber growth, given there is flexibility and publishing airfare deals, and helps to sell other deals like hotels and activity deals. The knowledge that a user wants to travel to a certain destination on specific dates will become increasingly valuable to our business as we offer a broader hotel product.

While we conducted our performance review we decreased our Search marketing spend and this impacted our revenues in Q1. As Glen mentioned, we expect to continue the reduction through Q2 where revenues will be down $1.5 million to $2 million compared to the prior year period.

Turning to slide 17, I would like to update you on our new hotel booking platform which we begin testing in late March with real consumers. We are investing in this new product for a number of reasons.

On the consumer side we are making it easier to do business with us. Prior to the booking platform consumers could not book where and when they wanted to go; they had to accept the places and dates in the deals that we offered. And many loyal Travelzoo subscribers booked our full price hotel with other websites because it was simply impossible to book with us. A large number of users did not want to deal with the hassle of buying a voucher.

On mobile it was also very difficult to book on very small hotel websites because their booking engines are not mobile optimized. On the hotel side Travelzoo could only help a hotel one to four times a year; we were never able to sell full price business. Many hotels didn't work with us either because they were unable to operate on the voucher model or they were opposed to running advertising. They preferred a commission model.

From Travelzoo's perspective we were unable to participate in the upside of peak season, the map on the right illustrates the problem we faced. Hotels charge higher rates in peak season and thus agents like us receive a higher commission. Because we only offered off-season deals our economic value to the hotel was simply lower.

We've also found over the years that hotels limit their activity with deals especially if they have to pay an advertising fee. So, for example, if a New York hotel wanted to promote advertising they made us run to the Northeast United States but of course it makes perfect sense to tell everybody all over the world about a deal of a New York City hotel.

So how are we doing? Let's turn to slide 18. We have now introduced about 200,000 subscribers to the new booking platform. And while it is still very early we have seen some very interesting data points to support the investment thesis. Of the subscribers who have booked so far 84% have never purchased a getaway on Travelzoo before. And during our test period hotel revenue among those who booked was $54.

In the prior two years the average hotel revenue, that includes all of the advertising revenue and all the voucher sales revenue from those consumers, was approximately $13 per year.

Turning to the right of the slide you can see what is happening on the hotel side. Almost half of all the bookings we deliver to the new platform were at full price, that's business we would have never have had before. Below you can see that over half of the hotels that we're working with on the new platform have not run with Travelzoo in over two years.

The Boulders, a Waldorf-Astoria Hotel, and the Hilton New York Midtown, those received over 300 bookings in the test period. Those were running full price rates. We noticed that the rates were very good and selling very well and then we were able to promote them to a broader audience. The New York Midtown Hilton hasn't been on Travelzoo -- has not been on Travelzoo for 11 years, so we are delighted to have them back.

While we are in the very early stages of taking consumer bookings and have much to do we are encouraged by these early data points. Let's turn to slide 19 to examine what we have in store for the remainder of 2014 for this new product. In Q2 we were already busy enhancing the UX, adding more hotels and improving our rates.

We are gradually introducing the booking platform to more subscribers messaging that they can now book any night of the year on Travelzoo. We expect further expenses and approximately $1.1 million in Q2 as we continue to perfect the product.

Turning to slide 20, I would like to remind everyone that the bookings we generate on the booking engine are recognized upon stay, this is different to our advertising or voucher businesses where the revenue is recognized upon booking. In our test period we found that guests are booking an average of 60 to 70 days in advance of stay. We are encouraged with our test data and we look forward to ramping this new business quickly.

Turning to slide 19, I would like to update you -- turning now to slide 20, I apologize, I would like to remind everybody that quality underpins everything that we do. Quality experiences drive repeat and referral behavior, helping our brand thrive over the long-term. Since the beginning it has been about quality and for us it will always be about quality.

Concluding on slide 21, our areas of focus for the reminder of the year are our first and foremost to maintain our quality leadership position by publishing high-quality deals and tightening brand control. We're accelerating top-line growth through audience engagement and products particularly on your hotel booking engine and mobile. And lastly we plan to invest for the future while remaining profitable.

Thank you for joining us, this concludes our prepared remarks. And now I will turn back to the operator for the question-and-answer session.

(Operator Instructions). Dan Kurnos, Benchmark.

Let me to start on the travel side here. Chris, the North America travel growth rate has been declining pretty steadily for the past few quarters now. I know that you guys called out possible weather impacts and it sounds like Getaways was a little bit softer this quarter.

Is there anything else that you could sort of point to as to why North America has been -- the growth rate has been slowing? Was there any impact from the reintroduction of Travelocity in the quarter? Just maybe talk about the overall health of the North American market. Thanks.

The decline was really due to a decline in Getaways as well as reduced spending by the online booking engine and international airlines. We do believe that there was some impact with that severe weather. And if you think about it, if you were sitting in New York City and you have got to drive out to Connecticut or to Massachusetts for a getaway and you can't get through that snow, that is going to be difficult.

As you know, there were a record number of flights canceled in that quarter so it was difficult to get to even further afield. And I believe now that there is a lot more demand for Caribbean flights in these months than we have seen historically because people are just wanting to get away and prices on Caribbean flights are now through the roof. So we certainly feel that there was some impact through that. But that is simply what happened.

Okay, and then just in terms of -- I guess maybe this is for Glen then. Could you just at least give us a sense of what total Getaways did combined in the quarter up or down?

Yes, combined it was high-single-digits percentage year-over-year growth. But that is a little deceiving because Europe's still growing strongly with over 35% growth. But we had some decline in North America.

Great, thanks, that is really helpful. And then, Chris, you know, I mean look, I can't imagine you were pleased with the way that local performed in the quarter. I guess I just want to get a sense of sort of what the game plan is to improve productivity going forward.

You did mention in your prepared remarks that -- or Glen did at least, that you are going to be cautious on headcount going forward. So if it is lower vouchers, how do you re-stimulate that demand? I am assuming that you are continuing to face take rate headwinds, but that probably hasn't changed at all. And then I will follow up after you answer that question.

The first thing just to point out is that as a brand we are very excited about local. And local being restaurants, entertainment, bars, activity. Because it allows our subscribers to engage with us more often. And when we look at the data we do see that travelers who booked flights and hotels then do consume our restaurants. And so that in the face of it is exciting.

The business is also -- the combined business of entertainment is also very profitable. So that is exciting. The format of the voucher is clearly something that we are working on and is a challenge. When I just look at the overall Internet -- the overall Internet opportunity for Local of course it is massive but nobody is completely cracked the code yet. We will test other formats in addition to our voucher format and direct format with some advertisers. But we remain very excited and we will continue to develop the business.

One change that we did make there is Mike Stitt is now back in the driving seat of the business. He was the guy who brought Local to Travelzoo, he has been with the business for many years, we opened the Chicago office together about 10 years ago. And he has got some tremendous ideas and an awful lot of energy to develop new concepts. And so he was the guy who was there in Des Moines and the beginning of Local and I am confident with Mike we will be able to develop a format that consumers like.

That is really helpful, Chris, thanks. And just == you had talked before a little bit about maybe getting more aggressive in China, is there any update there?

I'm sorry, in where?

In China or in Asia markets, bringing that in, getting that more involved (inaudible) local side.

Well, I don't know about --.

Yes, so the Asia business right now, we have our brand licensed in Asia and we sold that business in 2009. But we do have an option to acquire that back at some point in the future. So they are operating as a separate company right now, licensing our brand and technology.

And no plans to reacquire that, that is what I was getting at in the near term.

Yes. Since we have this option we look at that from time to time and look at that business and I think it is a great opportunity for the future to have that option.

Okay, fair enough. And then just one last one for me and I will step aside. On the hotel side, I don't know how much of an answer I will get from you guys, but I mean, look, with the bookings platform is there any way you can give us sort of at least generically what kind of contribution you are expecting this year and then next year from the hotel booking platform?

It is a little too early to say. I think probably by the time we get to the next call we'll be able to give some sort of answer on that. We were looking really more at metrics in the first period here and we like what we see. So we are seeing changing consumer behavior, changing hotel behavior and in a positive way.

The business is very, very early stage. I just sent an email out to everyone here in the Company and it is sort of akin to when we started that European business, I remember we were making losses in that European business, we were $300,000 in revenue roughly in the second quarter of being in business. And today that thing is annualizing at around $50 million, with $10 million in annualized profit.

So we are really at that beginning. It is May 2005 for that business. It probably goes a lot faster obviously because we have an audience built now, we have hotel relationships. But the business is early stage. And for me it is tremendously exciting. We launched many new businesses in this Company and we have been quite successful at doing that. So the metrics I am encouraged with.

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

Ed Woo, Ascendiant Capital.

I had a question I wanted to talk about Local Deals a little bit, specifically we had a last couple quarters of pretty big weaknesses. How do you anticipate the impact either from competitive issues or is this Company specific that maybe you think you can turn around or do you think it is broader industry impacts that is much harder to change?

I think it is clear like there is a broader industry wide decline in the whole voucher format, right? I mean there were hundreds of companies that failed and closed and other large competitors are not growing in that particular category with local deals and vouchers.

Consumers are buying fewer vouchers, it doesn't mean that they are not buying vouchers, they certainly continue to do so for great deals. But they would rather make the booking and be sure that they are going to go. So I think that the format is going to change over time and it will change for us and it will change for the industry in general. So that is what I see there.

Great. And then going off to Search, just out of curiosity why was your Search stronger in Europe than it was in North America? And you mentioned in one of your slides that Search will be a core focus of you guys. But just curious how you guys plan to either invest in that business or turn that business around.

Well, Glen can comment on why it was stronger in Europe and then I will comment on the (inaudible) performance review and the growth strategy.

Yes, on Search in Europe we did get a couple additional customers there and, just as a reminder, the market for the spend is inherently different. And so, there were a couple different dynamics this quarter that we are able to take advantage of.

And then on the growth strategy I am very pleased that we have David White you joined us from Yahoo!, he was on -- I think he was the first employee of Efficient Frontier, which was the search agency that was acquired by Adobe. And David has already conducted a strategic review, he has already pulled some cost out of the business.

And we are now thinking about Search and what are the positive elements of Search for the broader business. We see, for example, in our performance review that we do generate a lot of subscribers that we don't account for through Search. We have knock-on effects for our travel advertisers and hotels.

But if you use our core Search product today on Travelzoo on the homepage you see it is very limited. You can put in your dates. If you wanted to search for a flight on Travelzoo it would be very difficult. You have to go to Fly.com or you could use SuperSearch, but it is still -- we don't make it so easy.

And it is kind of ironic because we are one of the strongest travel brands in the market in which we operate. And we don't really have an awesome flight experience on our site. And you know that already we are developing an awesome hotel experience. The flight experience, we have got the assets so I think we could do something quite interesting there.

So I think over the next quarters you will see some of these things being tested and ultimately Search on Travelzoo will be the direction we head in.

Do you think you will have to make a pretty big investment (inaudible) hotel booking engine in this business or is this something that is still being I guess evaluated?

I don't think it will be to the magnitude of the hotel engine because the flight engine already exists. We have got it. Now we may need to modernize certain elements -- technology moves very, very quickly. So, for example, if we want to introduce a new form of flight search into apps we may need to invest there. But it is not to the magnitude of the hotel development.

Great. And then one last question I have is how do you see the overall travel industry shaping out? I know you mentioned the first quarter had pretty rough weather in the US and we had a bit a little bit of a delayed Easter. But absent those impacts what is your outlook heading into the summer months and how do you feel about the overall traveling industry right now?

I think we feel very positive about the industry. We would like to keep the thunder and the snow out. I heard it was snowing again in New York City yesterday. So that is not particularly helpful or when you are already in April.

But I think we are very positive and what we are seeing is hotel rates are definitely increasing, demand is overall increasing so it is good. The timing of our introduction into full price hotel booking activity is very positive. And I think in general we are pretty happy with where we are headed. Of course we are not happy with the Q1 results, but we see a very strong growth strategy.

Ed, one thing I did in the quarter also is I spoke to 10 subscribers, I just picked up the phone and spoke with them. And you mustn't forget just how strong this brand is and how strong the brand affinity is. Travelzoo has helped subscribers and consumers book over $10 billion worth of travel over the last 15 years and they were positive experiences. And that continues to build.

So I am very excited about the brand at the moment, probably am -- it just -- I just really feel that -- I feel the strength of the brand coming through.

Great. Well, thank you and good luck.

Thank you. I am not showing any further questions in queue, I would like to turn the call back over to Mr. Loughlin for any further remarks.

Thank you, operator. Thank you, ladies and gentlemen. We look forward to speaking with you next quarter.

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