Travelzoo (TZOO) 2014 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Travelzoo second-quarter 2014 financial results conference call. Today's call is being recorded.

Before introducing you to your host and beginning the Company's presentation, the Company would like to remind you that the statements made during this conference call and presented during the Company's slides are not statements of historical fact and constitute as forward-looking statements and are made pursuant to the Safe Harbor provisions (technical difficulty) to 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 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 a result of new information, future events or otherwise.

Please note that the call is being webcast from the Company's Investor Relations website at www.Travelzoo.com/earnings. Please refer to the Company's website of important information including the Company's earnings press release issued early this morning along with the slides accompanying today's prepared remarks.

An archive of the recording 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.

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, and good morning and thank you for joining us today for Travelzoo's second-quarter 2014 financial results conference call. I'm Chris Loughlin, Chief Executive Officer, and with me today is Glen Ceremony, the Company's Chief Financial Officer. Glen will walk you through today's format. Over to you, Glen.

All right, thank you, Chris, and good morning, everyone. For the format of today's call 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, 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 for the quarter is $36.9 million, down 11% year over year due to Search and Local revenue. Our non-GAAP earnings per share this quarter was $0.30, which is lower than prior year period due primarily to lower revenue, a higher effective tax rate and investments in our hotel bookings platform. Our subscribers grew 3% year over year along with continued mobile app downloads.

Slide 4 highlights our revenue by segment. Revenue in North America was $25.2 million, representing a year-over-year decline of 17%. And in Europe revenue was $11.7 million representing year-over-year growth of 6%. In local currency Europe revenue decreased year over year by 4%.

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

Slide 5 shows that North America year-over-year revenue decreased by $5 million. $2.1 million was due to our planned reduction of Search product marketing spend; $1.7 million was due to lower voucher sales for Local and the remaining $1.2 million was due to Travel. Our Travel revenue was impacted by lower voucher sales for Getaways, hotel fixed fee placements and lower spend by some advertisers, including certain online booking engines and tours and [ports].

In addition, there is some delayed revenue recognition on hotel deals running through our booking platform, which Chris will speak about in more detail later.

On slide 6 the Europe year-over-year revenue increase of $800,000 was due primarily to a 13% year-over-year growth in our Travel revenue driven by a benefit from FX as well as growth in Getaways. This was partially offset by declines in Local and Search.

Slide 7 provides some detail on our operating income and net income. We generated $6.6 million in overall non-GAAP operating income of which $3.8 million was from North America and the rest was from Europe, which grew 50%. Our tax rate increased driven by the fact that we no longer have accumulated operating losses from Europe's start-up years to offset our current European income.

Non-GAAP net income for this quarter was $4.2 million versus $5.2 million in the prior year period. The non-GAAP income amount excludes income of $3.5 million from a release of reserve related to our anticipated settlement agreement in connection with disputes over unclaimed property audits with various remaining states. As you may recall, we took a $22 million charge in our third quarter of 2013 which created the majority of the reserve for this matter.

Slide 8 shows the cost of revenue and operating margin. Cost of revenue as a percentage of revenue increased year over year primarily due to increased customer service cost. And our operating margin increased sequentially.

Moving on to slide 9. North America operating expenses decreased year over year by $2.9 million due primarily to our planned reduction of Search product marketing spend as well as lower earned commissions and bonuses. Europe operating expenses decreased by $500,000 and decreased as a percentage of revenue. We kept our subscriber acquisition marketing spend relatively flat year over year.

Turning to slide 10. This shows that our headcount decreased this quarter by nine employees. We selectively reduced headcount to increase efficiency.

Slide 11 shows an increase in DSO, which is primarily driven by the timing of our invoicing as well as the decreased revenue. Our cash position remained relatively flat at $60.5 million as we used our cash flow from operations to facilitate faster payments to our Local Deals merchants.

Turning to slide 12, in summary, we had a challenging top-line quarter, yet we were able to maintain consistent sequential profitability. We saw growth in Europe Travel yet this was offset by declines in North America Travel as well as lower revenue from Local and Search. We continued our investments in hotel bookings and mobile and still managed to slightly increase operating margin. In addition, we are maintaining our strong financial position with no debt.

Looking forward to this next quarter we expect the following: we expect the recent year-over-year declines in revenue to persist; we expect the second half of the year, including next quarter, to be seasonally lower than the first half of the year; we will continue our lower year-over-year spend on marketing for our Search products, namely SuperSearch, which will result in approximately $2 million of lower Search revenue year over year; we expect to continue our investment in our hotel booking platform which will result in an approximate $0.05 EPS impact.

In addition, we expect to incur increased levels of professional costs for various initiatives as well as increased levels of marketing costs. In regards to marketing, we expect to increase our investment in subscriber acquisition by approximately $2 million sequentially. We will moderate this investment subject to the performance of our business so that we can meet our internal profit targets.

This concludes the financial summary of our second quarter of 2014. So now Chris will provide you an update on Travelzoo's strategy.

Thank you, Glen, and hello, everybody. let's start on slide 14 where the chart in the center explains our strategy. On the X axis you can see that we're growing our audience and on the Y axis we're increasing our revenue per subscriber over time. We're confident in our long-term opportunity and we're currently making investments to drive future growth.

Our current investment strategy falls into two areas. First, we're investing in audience growth, not just by expanding our traditional email subscriber base, but increasingly we're adding Facebook fans, Twitter followers and, importantly, mobile downloads. And second, we're investing in product development. We're reengineering our products to allow users to easily search for what they need, where they need it and when they need it. And our focus is primarily on mobile and hotels.

So let's turn to the next slides to review how we're doing. On slide 15 you can see that over time audience growth has been a key driver of our revenue growth. In the quarter we added 130,000 net new email subscribers, 275,000 app downloads and 50,000 social media followers. We believe that by growing our audience further we can continue to grow our revenue as demonstrated on the left.

We're pleased with our progress in mobile. We continue to see the percentage of users accessing Travelzoo from a mobile phone increase. In the UK mobile traffic exceeded desktop in certain weeks of the quarter and click through rates in our new photo emails or photo driven top 20 are higher on mobile phones.

We also saw that Local Deals purchases increased through mobile phones, largely due to the fact that we have more deals available. This quarter almost a quarter of all Local Deals purchases were made on a mobile phone compared to 15% this time last year.

Turning to slide 16, I'd like to talk a little more about our investment plans for audience growth. Over the past three years you can see that we've focused on controlling our costs within our Local Deals and Search businesses while investing in product development, particularly on the hotel booking platform, which is now ramping.

At the same time our LTV to CPA ratio has been relatively stable at 4 to 1, so this gives us confidence to now invest up to $2 million per quarter in addition to our current spend on subscriber marketing over the next two quarters. And this investment will result in a quarterly reduction of EPS of approximately $0.10 per quarter.

We'll moderate our investments subject to the performance of our business so that we can meet our internal profit targets, as Glen previously mentioned.

Let's turn to slide 17 and review our products. At the end of Q4 we announced a review of Search and on the left you can see our Search business has been in decline for some years. We attribute the declines to a challenging competitive environment; an increasing cost of traffic; the move to mobile, for example our SuperSearch product is not currently available on mobile; and deteriorating economics and flight advertising.

A review concluded that Search remains a very important and integral part of our strategy. If you think about it, most travelers start with a search and there's a great deal of value in the information knowing where a user wants to go and when they want to go.

Since our last update we've continued to reduce our reliance on Google ad words, driving profitability but reducing revenue. We've renegotiated our supply-side contracts improving our margins. We've tested further integration of Search, for example, if you use a Travelzoo app you'll now see a very obvious link to Fly.com. And we started to leverage our intent-based data through user alerts.

Moving on to slide 18, I'd like to update you on our new hotel booking platform. We're investing in the new hotel booking platform for a number of reasons.

First, in our existing model our subscribers can only do business with us when we have a deal, not when they need a deal. By providing a searchable booking engine with hotels that are always on we're able to help our subscribers more frequently.

Secondly, hotels are only able to work with us three to four times a year when they have extreme needs. But they'd rather work with us year round.

Third, some subscribers and hotels find the voucher model rather complicated. Consumers have to buy the voucher then call the hotel and check availability to book and that can be time-consuming and often rooms could be sold out on popular days. Knowing availability in advance is an obvious advantage and being able to book electronically is another obvious advantage.

Fourth, we're rapidly becoming a mobile Company. Our mobile users prefer to book easily with us through our mobile products where their credit card is already stored and they can just click over and press the green button, not linking over to a myriad of different hotel websites, many of which are not optimized for mobile.

And finally, on the hotel side most hotels prefer a commission. They would like to run of course many more than three to four times a year.

Turning to the right of the slide I provide an update of where we're at and what the early data is telling us. We can confirm that we're turning on hotels that never worked with us before. Some 50% of the hotels that we've turned on did not work with us in the past two years.

One example is the B Resort in Disney World. We put 1,200 rooms into that hotel in the quarter generating $31,000 of commissions. We were able to distribute that hotel content not just to the United States and Florida region, but also to Europe.

We introduced a searchable booking engine to a very small number of our subscribers on desktop at the beginning of the quarter. Our mobile search engine then went live on mobile in June. We already see that our mobile -- we see that 20% of all searches are now originating on mobile, consistent with our strategic objective.

We're encouraged to have completed our first full quarter of testing and pleased with the momentum the team now has. Over the second half of the year we'll significantly ramp up the percentage of subscribers who will be able to access the system. Currently we see that 2.5% of the total audience has accessed the system. So we've got quite some ramp to go.

We'll also at a significant number of new hotels and we are in negotiations now with larger groups recently having signed Caesars Hotels.

So let's turn to slide 19. We can start to see some of these trends in our business going forward and we can see how we might benefit. While the demand for our hotel ad format and voucher format trends down, our commission model is definitely trending up. The commission model allows us to attract more hotels and work with existing hotels more often and keep our subscribers happier.

There is a delay in revenue recognition, however, typically 40 to 50 days after the booking is made. That's very different to the advertising model which is recognized on the advertising being booked and different to vouchers where we recognize the revenue as soon as the purchase is made.

One obvious point when you look at this slide is that operating three hotel models adds too much complexity to the business. And yes, over time we will consolidate our approach and make things rather simple.

So turning to slide 20, I want to remind everybody that quality underpins everything that we do. Quality experiences drive repeat behavior helping our brands drive over the long term. And since the beginning it's always been about quality for us and it will be about quality into the future.

Concluding on slide 21, our areas of focus for the remainder of the year are, first and foremost, we plan to maintain our quality leadership position by publishing high-quality deals and tightening our brand control. We obviously want to reaccelerate top-line and long-term revenue growth and we're doing this through investing on our audience growth and by investing in our hotel booking platform and mobile products. Lastly, we plan to invest in our 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.

(Operator Instructions). Ed Woo, Ascendiant Capital.

Yes, I had a general comment or question about the travel industry. How much is it helping or hurting your business both in the USA and in Europe?

We are signing up hotels into the new booking platform at a good rate. I think we have that product at the right time. As hotels become increasingly occupied they're less inclined to spend money on an advertising model, but they're quite happy to spend on a commission model. So I think that's one trend that we're seeing there.

We did in the quarter, I think Glen mentioned that we did have one large tourism board pull back. That's a rather political decision, it's not so much an economic decision and is somewhat out of our control, even if we had the best salesperson in the world. So otherwise I think in general things are quite positive.

In the US as well as in Europe?

Yes.

All right. And the other question I had is you mentioned that you've pulled back (technical difficulty) on Search, but yet you did your analysis and realized that Search was an integral part of your business. Will you be we reaccelerating your ad word spending in order to drive more traffic? Or what's your overall -- or how do you vision Fly.com and SuperSearch in a year from now as part of your business?

Yes, Ed, maybe -- what you see there on the mobile app is that there is a symbiotic relationship between Fly.com and Travelzoo. Fly.com is now linked on the bottom right of the app. And the other thing -- two more things that we found in that review is one is there's a lot of data in SuperSearch and Fly.com. Users are telling us where they are and where they want to go.

We started testing a new product called [Alerts] during the quarter. We see phenomenal click through rates and we've spoken to the users who've received them, they're very happy. We even had one lady who I actually spoke with. She received an alert about Fort Lauderdale and she was delighted because she was planning to go to Fort Lauderdale. And through the alert she found deals on Travelzoo that she would not have found otherwise.

So -- and that really ties back to our strategy of helping our subscribers find what they need, where they need and when they need it. So the data is kind of interesting and helpful in innovation.

The last thing we tested was the integration of a flight search tool on Travelzoo, which is really a combination of Fly.com and SuperSearch. That is too early to give you an update on. But it's a pretty neat concept where you can look across multiple dates.

One thing in the quarter -- we were awarded a US patent for showing airfare prices in a calendar view. And indeed the product that we built combining SuperSearch and Fly.com does use that technology that we designed.

Great. And do you anticipate a spending [slide off] for hotels and other travel products? And right now -- you guys use Kayak right now?

We'll review our hotel situation on Fly.com perhaps a little bit further down the line. Right now we're ramping our Travelzoo hotels offering and it is indeed ramping sequentially every month. And that's what we're going to stay focused on right now. But I think ultimately Fly.com will benefit from the new platform.

Great. And just to clarify -- you said that 2.5% of your subscribers have access to the booking engine right now?

They've accessed it, yes. 2.5% of the subscribers have accessed it.

Great. Well, thank you, and good luck.

Dan Kurnos, Benchmark.

Chris, let's dig down a little bit into Travel here, two-parter. First, you did mention sort of this one time pull back with a large tourism board. Historically when advertisers have pulled back at the beginning of the year, at least when we saw this in 2012, it was transitory in nature and recovered in 2013.

I just I want to get a sense if your comments are implying that hotels are now shifting away from an ad driven model and there is expected to be further ongoing pressure.

And then maybe, Glen, if you could just quantify, at least to a degree, how much of an impact on revenue that pull back by the tourism board represented in the quarter?

Yes, Dan, I think Glen can handle the whole question and just go through the numbers on what's happening there in North America Travel.

Yes, so, the tourism board pullback was about $600,000 on a year-over-year basis. So it was pretty significant for us. And like Chris said, it's one of those things you keep on pushing, but there's certain dynamics that are not in your control. And when they decide they're spending or not. So, does that help, Dan, on that question? That's a big chunk of the decrease.

On the ad side, yes, on the hotel fixed fee placement we did see some decreases there, but that's not wholly unexpected by us. That's one of the reasons why we're launching the hotel booking platform, because we know that that's a harder sell. They're taking more risk with that sell and they've just been less and less inclined to do those placements when the marketplace has commission-based offerings out like either vouchers or hotel booking.

Okay, so that's helpful. So I guess that's partially why you expect additional pressure in the back half of the year, your comps get a little bit tougher too. So if your advertisers are pulling back in general, we could see travel remain pressured until we get the hotel booking platform up and running. And on that front was there any meaningful contribution from the platform in the quarter?

Not significant. In part due to some -- the rev rec that Chris had highlighted, just the delay. But just -- the other part is just we're in the middle of the rollout and trying to get the inventory of hotels up where we want to see it. And then opening it up to more of our subscribers is one of the future goals that we're going to execute on in this next quarter, so we should see some more ramping. But not a significant contribution this quarter.

Okay, thanks, yes, I didn't think so, but just figured I'd ask. And then on Getaways, I guess maybe I'll stick with you, Glen, here. You mentioned last quarter that there was sort of a dichotomy between the two -- at North America Europe. We had North America declining. I'm assuming that continued. Europe had some growth, but I don't know if we saw maybe a moderation in the growth rate. If you could just give us some color on how Getaways performed geographically in the quarter that would be helpful.

Yes. So on North America it definitely declined, so we have some continuation of that trend. And the story there is just there's -- I think we're lapping a couple years of hotels kind of writing these getaways out.

And while it works for some of the smaller hotels the larger you get the harder the voucher product is for them to manage their yield. So they're going to prefer the booking engine to the vouchers, right? In Europe, there's still growth but it's decelerating. And I would say overall we're slightly down.

Got it. Great, thanks, that's helpful. So let's shift over to local just in general. I know I asked you about this last time, Chris. You've been sort of balancing local. It's been declining, you've been expanding internationally. Just any thoughts on whether or not you want to shift the model and go for more growth and pick up the option on the Asia business? I know that would sort of change the way that you look at the business versus profit relative to growth, if that's still on the table for you?

Well, I think there were about three questions in there -- one was about Local, two was about Asia and three was about growth. So on Local, actually I was really pleased with the progress that Mike Stitt and his team made this quarter particularly on mobile. We have now over 1,000 deals live and just having that ubiquity makes our mobile products more useful. And as a result our conversions increase, so that's very positive.

Then on Asia, we don't really have any comment on Asia at this time. And then on growth, we obviously want to restore growth and we're investing in our subscribers. If you go back and look at 2009 when we were a much smaller business, we were investing more then than we have done over the last two years. And at a certain point we need to put a foot on the gas to now continue the momentum on audience growth.

You know, we've always been very prudent in managing the business around profitability. So while Local Deals and that industry in general was changing and we were investing in a new hotel platform it wasn't the right time to also put our foot down on audience growth. But we're still in a pretty good place with these things now and I think now is the time to go.

And then just in general sort of a high-level question on Local. If hotels are pulling away from the voucher product on getaways, are you seeing a similar phenomenon with regards to consumers on the local side? Do you think you're going to change the platform on Local, Chris, over time to be more efficient, get away from the voucher model?

You know, we're already [operating] multiple models on Local, right. So for example, we were selected as the national online partner for Cirque du Soleil's anniversary show that ran across the country. And there was an enormous advertising campaign that we put out this quarter. That was not on a voucher, that was all directly to Cirque du Soleil. And that's part of our Local business.

So we are always interested in different models. With restaurants in particular it's very difficult to envisage a model where they would pay us. It's rather at the moment we operate a merchant model, we take the payment and then we pass the revenues through.

This is what GrubHub does and generally that industry does, restaurant.com does it. Because collecting from 8,000 different restaurants would be quite difficult. If there is a new approach around collecting, we're certainly interested in experimenting with it.

And then just, Glen, can you confirm that the take rate was similarly pressured this quarter as we've seen in the past couple of quarters?

Yes, it was a consistent trend, as you saw last quarter.

Okay, thanks. And just last one for me and I promise I'll stop. In terms of the marketing spend, I did want to touch on this because I think it's interesting that you're getting more aggressive now, Chris. I like the idea to go after new subs.

Although I will say that in the quarter it looks like you guys, even with the search spend ratcheted back to a similar level as Q1, you cut back spend in sales and marketing to maintain profitability this quarter.

I wonder if that was similar to the vein that you've put forward that you're going to moderate spend depending on the performance of the business and that's why you cut it back in this quarter. Or if there was any sort of offset here, one time here that caused marketing spend to be lower?

Well, we're always monitoring our profit targets. And we do pull back if we are concerned that we won't come in where we need to. We're quite serious about increasing our spend.

I think we announced this several years ago, you'll remember, that we wanted to increase our spend and I think we increased it slightly for one quarter and then we had to pull back. That was because we were really entering quite a tumultuous period with our Local Deals business and we wanted to start investing in the hotel's program.

We're in a very different place now and it's very clear that it makes sense to invest in subscribers and we're really starting to ramp that hotel product. I think also just the cost base in Local is very different today than it was two years ago. So there's a lot of reasons why this is really the right time.

I lied, one more for me. In terms of that spend, this is really more of a follow-up. Can you just give us a sense of how you -- which buckets you intend on putting that spend in and how you intend on distributing the spend between North America and Europe?

Glen, would you like to comment on that?

Yes, I mean I think -- across the board I think I would view it as even -- maybe even a little weighted to Europe because there's some opportunities in places like Germany to really take advantage of some additional growth in subscribers. But I would say overall we're going to spread it out between North America and Europe.

And in terms of channels?

Yes.

Well, (multiple speakers) it will mostly be online for subscribers. And then you sort of have a funnel effect, right. There's two things that occur. One is you obviously generate more traffic because some people come and don't sign up, that's one thing that happens.

And then also once we have a subscriber we can inform the subscribers around mobile downloads. I mean, if you look at that it's actually quite remarkable. We have 3 million mobile downloads and it's all organic, we haven't advertised at all yet for mobile downloads. And I think that whole funnel effect works quite well.

All right, thanks for being patient with me, guys. I appreciate all the color.

That was our final question for today. I'd like to turn the call back over to Mr. Laughlin.

Thank you very much, operator. Ladies and gentlemen, thank you for your time and support. We look forward to speaking with you next quarter. Have a nice day.

Ladies and gentlemen, thank you for participating on today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.