Travelzoo (TZOO) 2015 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Travelzoo first-quarter 2015 financial results conference call. (Operator Instructions) 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 all statements made during this conference call and presented in the Company's slides that are not statements of historical facts constitute forward-looking statements and are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contained in the forward-looking statements.

Factors that could cause the 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 the Company's 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 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: Mr. Holger Bartel, Travelzoo's Executive Chairman. Sir, you may begin.

Thank you, operator. Good morning, everyone, and thanks for joining us today for Travelzoo's first-quarter 2015 financial results conference call. I am Holger Bartel, the Executive Chairman. And joining me today are Chris Loughlin, our Chief Executive Officer, and Glen Ceremony, the Company's Chief Financial Officer.

Glen will walk you through today's format.

Thank you, Holger. For the format of today's call, I will review our first-quarter financial results. And then Holger will provide an update on our strategy and how it impacts our financial performance in the short term. Thereafter, we will open the call for our question-and-answer session.

Now, please open our management presentation, which is available on our investor relations website 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 was $36.5 million, down 9% year over year, primarily due to declines in local deals and getaways as well as the negative impact of the strong dollar on our European revenues. Our earnings per share this quarter was $0.13, which is lower than the prior-year period, due primarily to the lower revenue and an increase in spending on products and member acquisition. Our members grew 4% year over year, along with a continued increases in social media followers and mobile app downloads.

Slide 4 highlights our revenue by segment. Revenue in North America was $24.7 million, representing a year-over-year decline of 6%. And in Europe, revenue was up $11.8 million, representing a year-over-year decline of 15%.

In Europe's base functional currency, which is the British pound, Europe revenue decreased year over year by 7%. And after further adjusting for the decline in the euro, the year-over-year Europe revenue decline was 4%.

The next few slides cover further detail on our North America and Europe segments. Slide 5 shows the North America year-over-year revenue decreased by $1.7 million, $1.1 million of which was due to lower voucher sales for local. And $1.2 million was due to travel, which was impacted primarily by lower voucher sales for getaways and reduced spend by certain vacation packagers.

During the quarter, we continue to run more deals through our hotel booking platform instead of the getaways model, which affects revenues, because, in these cases, revenues are recognized much later. In local, voucher sales coming from push promotions have decreased, while we are increasing the number of deals that are available when our users want them. Offsetting these declines in travel and local, there was an increase in search revenue of $600,000.

On slide 6, the year-over-year revenue decreased by $2.2 million. $400,000 was due to our planned reduction of search product marketing spend, $200,000 was due to lower voucher sales for local, and the remaining $1.5 million was due to travel, which was impacted by lower voucher sales for getaways.

Overall, Europe's revenue was negatively impacted by the strong dollar relative to the British pound and euro by approximately $1.5 million.

Slide 7 provides some detail on our operating income and loss. We had $3.8 million in overall operating income. North America had $2.1 million of operating income and Europe had $1.7 million. The operating income is lower year over year due to continued increased investments in our products as well as member acquisition. We continued these investments despite lower revenues related to our product transformation.

Our net income was $1.9 million, which includes tax reserve for certain state tax matters of $500,000 recorded during the quarter.

Slide 8 shows the cost of revenue and operating margin. The cost of revenue as a percent of revenue decreased year over year and quarter over quarter. The largest decline was quarter over quarter and was driven by reduced member refunds and higher relative revenue in the current quarter.

Operating margin improved quarter over quarter with the seasonally higher revenue. And on a year-over-year basis, it was impacted by our investment in our products and member acquisition.

Moving onto slide 9, overall, our expense base was only slightly up by $100,000, despite our significantly increased investments. North America operating expenses increased year over year by $1.2 million, due primarily to our planned increase in member acquisition and marketing, our increase in product development, and in search marketing. These increases were offset with cost reductions we obtained in an effort to improve productivity.

Europe operating expense decreased by $1.1 million, which was driven by our planned pullback on search marketing and other cost reductions to improve productivity as well as the positive impact of FX on our expenses.

Slide 10 shows that our headcount decreased this quarter by 28 employees. We are focused on increasing productivity to partially fund our investment in products and audience and we did see some productivity improvements in the quarter.

Slide 11 shows that our DSO was lower than our last quarter, yet higher than last year. This was due primarily to an expected longer collection cycle from one of our new partners in search.

We generated positive operating cash flow of $2.4 million this quarter. However, our cash position was down from $54.8 million last quarter to $54 million in the current quarter, due primarily to the negative FX changes on the cash we hold in Europe.

Much of our cash is held in non-US locations and therefore would be subject to US taxation if we brought it back to the US. Therefore, we have been careful to manage our capital allocation within each region.

Turning to slide 12, in summary, first, revenue declined as expected, primarily due to local and getaways and the negative FX impact. Second, we planned for the lower profitability due to continued investments in product development and member acquisition. And third, our cash position remains solid, yet was impacted by the continued negative FX translation on our European cash.

Looking forward to our second quarter of 2015, we expect the following. We expect the recent year-over-year percentage rate declines in revenue that we have experienced over the last several quarters to persist. This is due to the transition of our products that is still underway, loss of certain vacation packager revenue, and the negative impact from FX rates, which are expected to be even more significant in the second quarter as the British pound and euro reached their peak levels in prior-year second quarter.

We expect to continue our increased investment in product development as we transform our products in order to address what we believe is needed to enhance and protect our business. On a quarter-over-quarter basis, we expect to add an incremental $600,000 of product spend.

In addition, we expect to incur increased levels of member acquisition and marketing costs over the next several quarters by approximately $2 million to $3 million year over year, with an expected $1 million increase quarter over quarter. We will moderate this investment subject to the performance of our business.

In summary, because of these investments, this means we expect to generate lower operating income year over year or potentially operating losses. We are taking steps to control noninvestment area costs and are focused on increasing productivity of the resources we do have deployed.

This concludes the financial summary of our first quarter of 2015. So now Holger will provide you an update on Travelzoo's strategy.

Please turn to slide 14, then. Our growth strategy continues to be built on two pillars. On one hand, we are looking to grow our audience and in particular, the number of members. This is shown on the axis here. And at the same time, we are enhancing our products to serve our users better.

We not only want them to receive deals from us by email and social media, but we also want to help them when they are actively searching for something specific, like a hotel room in a destination on a certain date. We believe that these product enhancements will result over time in higher revenues per member.

On page 15, let's look at our audience strategy first. Three quarters ago, we have revamped our efforts in growing our member base more rapidly than in the previous two years. On the one hand, this includes increased investments into acquiring new members via marketing, as Glen spoke about. And on the other hand, we are also exploring and testing new ways to leverage the existing member base. We also continue to expand our network of top quality publishers.

Page 16 gives more details. During the first quarter, we increased member acquisition and related marketing spend by roughly $2 million over the same quarter in the prior year, with a larger share in North America. Over the next two quarters, we plan to further increase these investments with a stronger focus on Europe. We are also planning to further test various off-line campaigns.

Provided that we meet our internal revenue and profit expectations, these planned investments would be approximately $1 million over the first quarter of 2015 and $2 million to $3 million over the previous year.

As I mentioned in the past two calls, we are now focusing more on quality of new members rather than sheer quantity. But we still managed to add more new members during the quarter than in any quarter over the past 3.5 years.

Let's move to page 17 and our product strategy. We have been very successful in the past 15 years to inspire our users by telling them about great deals at quality places. We will tell them, for example, to take a five-day trip to Iceland at an amazing price. But when they are simply looking to find a deal for an upcoming weekend getaway in New York, we offer little help.

We believe there's a great growth opportunity to serve our members better by helping them find deals when and where they need them. How does this strategy translate into our business?

As page 18 shows, we are investing into making our products easier to search and simpler to use, particularly on mobile. In particular, we have launched our hotel booking platform, which allows users to find deals anytime and book them easily on any device.

We relaunched that capability on our website at the end of February, with a main focus on some key destinations, such as New York, Las Vegas, or Chicago. But we have not promoted this functionality much to our members as we are still making product adjustments and beef up our content of hotels. These investments increase our product-related expenses in the short term.

Also, moving deal transactions from vouchers onto the hotel booking platform comes with a delay in revenue recognition, as Glen and I have previously explained. Net revenues from bookings are only recognized after hotel stay -- after the hotel stay has been completed.

With vouchers, on the other hand, revenues are recognized when the voucher is sold. So on the bottom right of the chart, you can see that we will now have an increasing amount of revenue that will be recognized in future period from bookings that have occurred in the past. With the voucher model, these revenues would have been recognized in the quarter when the bookings were made.

On page 19, let me talk about our local deals business. Like all others in the industry, we are seeing a shift in consumer habits. They purchase deals for restaurants, bars, or fun activities less in advance, but at the time when they need them. This shift from push to pull is also affecting us and we are responding in two ways.

On the one hand, we are increasing the number of deals that are live on our site and our apps, which can be purchased at any time. On the other hand, we are developing products that make it easy for our users to find deals close to them wherever they are.

We are also experimenting with alternatives to the rigidly voucher format and mobile purchases; as well as what I call pull purchases continue to increase year over year as a percentage of total sales.

Let's now look at search on page 20. We have started to see better monetization of our search traffic, which allows us to slightly increase marketing spend for our search products. Those include SuperSearch and Fly.com.

But with Google having made some adjustments to both their browser and ranking of sites in SEO and SEM towards the end of the quarter, it is difficult to judge what level of marketing will continue to be efficient in the next few quarters.

Turning to the next page, 21, we are proud to continue to be the quality leader in this business. Day after day, our staff of over 100 producers select, research, negotiate, and validate the very best deals. Whether it's the spa at a Four Seasons Hotel or dining at a top-rated restaurant, our focus is always on quality.

We do not want to recommend any deal to our members which we would not use ourselves. And our test booking centers in Europe and North America ensure that deals that we publish are real and valid and not just bait and switch.

We believe that our passionate focus on the very best deals at the very best places drives loyalty in the long run and positions us well for long-term success.

I summarize our management focus on page 22. Maintaining and even strengthening our quality content leadership is crucial. We intend to resume top-line growth in multiple ways, via products that make pull equally simple as push and by continuing to grow the number of people who use us. But as we invest on both fronts, we would like to remain profitable.

Back to you, operator.

(Operator Instructions) Dan Kurnos, The Benchmark Company.

Thanks for taking my questions. I just want to dig down little bit here into the subscriber goals here. I know that we've talked before about maybe offering a few more metrics so we can get a sense of how -- what your ROI is there and how the business is actually trending in terms of active subs into a repeat business. And so if you could give us any color there, that would be great.

But I guess I also just want to get a sense of maybe quantifying exactly what new member growth was in the quarter. How much of it was actually due to seasonality. Obviously, a lot of people sign up at the beginning of the year.

And why was churned so high, since total subs were only up 4% year over year, although you spent a lot more on new subs? Thanks.

Glen, why don't you take the first part and then I'm going to comment on the churn and the quality?

Yes, I think -- on how we look at the subscriber -- the member acquisition is we're going out in the market and looking at the prices. And we look at it from a lifetime value perspective. And at the prices we are seeing, it is still based on our member, our long-term revenue per member. It still makes sense for us to keep on adding subscribers.

So this increased investment did add a significant amount of subscribers during the quarter. And that was helpful from a long-term perspective, because I think in the past few years, we haven't made those kind of investments. So we're pleased to see that.

I think from a unsubscribe basis, I don't know if we've seen in Q1 a regular peak in added subscribers just organically. I don't know if that part you got right, but the unsubscribes happen over time and we didn't see any huge unusual patterns there.

And part of the unsubscribes is also what we call technical unsubscribes. Sometimes when some ISPs contact us and say you are -- we have identified that certain emails are not valid, and even though we see these people have clicked in the past recently, they might have become inactive. And then we unsubscribe such an email address.

And that just varies from quarter to quarter, depending on what we hear back from the ISPs. Because overall for us, it's very important, of course, to have good deliverability of our emails.

And then second, as I said last quarter, we are really focusing much more on quality of new members. They are more expensive to acquire, so we don't see the increase in spend immediately or actually probably in the next few quarters. You will not see a dramatic increase in overall membership, because, you know, two, three years ago, when our model was mainly advertising driven, we could just look at a new member and see how much did they click.

Now, we are selling vouchers, we are generating hotel bookings. We can judge much better if a new member is worth a lot to us or relatively little. A new member that we acquire who quickly makes a hotel booking from which we generate, let's say, $50 in commission, of course, is quite valuable. And we were not able to do that in the past. So as you see, we have an increase on -- increased focus on quality rather than quantity.

Perfect. The second part of that answer, Holger, was actually exactly what I was looking for.

And then there was a pretty big reduction in the European headcount. Just can you give us your thoughts? Obviously, if you exclude FX, it sounds like Europe wasn't as bad, I think, maybe as we were anticipating. Just your thoughts on sort of how you attack the non-US platform and really where you see the areas of opportunity.

Chris, do you want to comment on Europe?

Yes, we only saw a headcount reduction in Europe of three. So maybe you're looking at the North American number, which was a little bit more than three.

The European picture looked at the FX rate having a clear impact on the results. I think the team is quite pleased with how the quarter came out. They are also transitioning into the new hotel booking platform, which means we're not selling vouchers, where we recognize revenue right away. And we are obviously showing some revenue into the next quarter from that booking platform.

There's quite a bit of groundwork that needs to be done prior to launching that booking platform into the markets as well. So I don't want to use the word distracted, but the team has to get that work done in order to get that booking platform live in those countries.

You can't just go into Germany with a New York hotel written in English, for example. That needs to be written in German, it needs to be priced in euros, and you've got to contract with those hotels in those markets.

So all of that work is being done. I think Glen pointed out in reality, Europe was down 4%. Some of that was pullback on SuperSearch on Fly.com to drive some profitability. So I think generally, the Europeans are reasonably happy there.

I really want to say, I want to complement our teams this quarter in North America and Europe. They work very, very hard. We had a slow start and then we really did quite well in March.

But as Chris said, there's a lot of transition. But people really went in and -- and really just to comment on this headcount reduction, because it's really related more to an increased shift on performance. And our model is sort of do more for less.

And one area where both Chris and I are particularly pleased is, for example, local deals. We've become incredibly productive there and the team in local has done a fantastic job in March.

You still see, of course, revenues declining year over year, but what is happening that a few of the fairly weak players have left that area. And that allows the strong players to really grab some additional territory and become even more successful.

And that's why we've seen some really good gains in local deals, for example, and in a few other areas in North America as well. And we're quite pleased with that and our model continues to be to just raise the bar.

Great. Thanks for all the color there. And yes, Chris, obviously, I know North America was down a lot more. I just thought maybe building out the platform, you would be adding the heads there, but you gave a good explanation just to sort of your thought process there.

So just maybe one more, I guess maybe for you, Holger, then and I'll step aside. I know we talked about sort of refreshing the website and your longer-term goals here. Obviously, you've made search functionality a bigger priority. It's gotten a little bit more prominence on several of the pages.

Just curious on sort of your timing of when we get maybe another sort of front-end refresh. Or how you think about breaking out the segments to be both more mobile friendly, although you have a strong travel presence on the mobile app. And just how you think about breaking out the website going forward? Thanks.

Yes, we have a lot of work underway, a lot of projects we are working with some outside companies as well. Not a lot that you see right now. But we have quite -- we are quite ambitious for this year and we hope to have some -- quite some product changes towards the end of the year. But we are all working very hard to improve things on the way as quickly as we can. So thanks, Dan.

All right, great. Thank you.

Ed Woo, Ascendiant Capital.

I had a couple of clarifying questions. I didn't know that -- Glen, you mentioned that Q2 guidance, you expect continued declines in revenue. Is it a similar decline or do you state what the magnitude of the declines were?

No, we didn't get into the magnitude, because we haven't done that historically. But what we're seeing is just with this needed product transformation, that does have an impact on the revenue.

And then on top of that, the few other things I mentioned: the vacation packager revenue is down a bit and that will be sustained and the FX impact will increase going into this quarter, in particular, because it was at a peak last year's Q2.

So if you look at the last several quarters' declines, I think that's a good barometer for what we are expecting.

Great. And then you mentioned that you going to be increasing marketing spending $2 million to $3 million year over year for the next several quarters. I know that you probably had product development investments in the first quarter as well.

But yet, your overall expenses were about relatively flat versus last year. Do you think that that could be the same over the next several quarters that you can increase the spendings? And how were you able to increase these spendings, but yet manage to have overall expenses about flat?

It's a lot of hard work by the team. I think part of that was due to just the team really looking at, taking a hard look at the non-investment areas and making sure we're being as productive as possible. So part of it was self-funded. So we are hoping to continue that effort and make sure we are trying our best to keep those noninvestment areas as productive as possible.

Great. And then last question I have is how's the hotels booking engine progressing? Is it fully live open to everybody or is it still kind of in beta testing in North America and Europe?

Ed, anyone can book a hotel. But as I said, we haven't promoted it yet. And we still have fairly weak content in some destinations. We focus on the destinations that are most important.

And before we really promote it more to our member base, we want to make the product better and also increase the content. But if you want to go to Travelzoo and book a hotel for New York for this weekend, you can do so and we are happy if you do.

And to be clear, Ed, that's within the United States only. So it's not live in any of the other countries yet. And it's not on the homepage yet.

And you might not find it that easily, because we really don't -- we're still a bit in testing mode, rather than promoting mode. Okay, thanks, Ed.

All right, thank you.

Tom White, Macquarie.

This is [Matt Kerom] for Tom White. Thanks for taking my question. My first question is a product-related question. Base stage, you guys are transitioning towards more of a pull-oriented marketplace.

Can you give us an update of what kind of inning you guys are in in terms of scaling out your supply and developing the product?

Our main focus is on hotels at this time. So I think we have invested quite a bit of effort and money as well over the last 1.5 years to build that platform. But there's still quite a bit of product enhancements that have to occur. And as Chris mentioned, we have to roll it out in other countries, even worldwide, at some point in time.

And then regarding the content, yes, we are. We have very good coverage now in sort of the top 10 destinations for North Americans. But I think we need another couple of quarters to really bring in more hotels in areas where what I would call secondary markets.

Okay. Great, thanks. And a follow-up question, actually, is recently, we've seen a lot of M&A in the travel industry. And I was wondering if you guys see any opportunity or risk for you?

You know, I would say it's probably more of a good thing for us, because particularly in hotel distribution, you now just have two massive players. And when I speak with consumers, they say oh, great, I'm using a website called Trivago. They compare all of these prices from Expedia and Hotels.com and Orbitz and Travelocity. And I tell them well, are you aware that all these sites are owned by the same company? Oh no, I didn't know about that.

And then are you even aware that Trivago is even owned by the same company? No, of course. Well, so they basically in essence compare their own product against other websites that they own themselves.

So you really have massive concentration there. And I think when we speak with the hotels, they are quite pleased to have some additional players in the space. And you know, we are one of the remaining independent players here. And I think right now, that's a good position to be in.

Okay, great. Thanks. And last question --

I thought that was your last question.

One more, sorry. (laughter) I'm seeing -- we saw a bit of leverage in your cost of revenue this quarter, the first time in quite a while. I was just wondering if this is a sustainable trend going forward?

I think from a year-over-year basis, that makes sense. With the seasonality between Q4 and Q1, that was the main driver of that drop seasonally.

Okay, great. Thank you.

Thank you. And I'll now turn the conference back over to Mr. Holger Bartel.

Well, ladies and gentlemen, thank you again and for your time and support. And we look forward to speaking with you again next quarter. Have a nice day. Bye.

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