Travelzoo (TZOO) 2015 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Travelzoo second-quarter 2015 financial results conference call. At this time, all participants have been placed in a listen-only mode and the floor will be open to questions following the presentation. This 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 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 may 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 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 and accompanied today's presentation remarks. An archive recording for this conference call will be available at 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, Holger Bartel, Travelzoo's Executive Chairman. Sir, you may begin.

Thank you operator. Good morning and thank you all for joining us today for Travelzoo's second-quarter 2015 financial results conference call. I'm Holger Bartel, Executive Chairman of Travelzoo. Joining me today are, as usual, 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 second-quarter financial results and then Holger 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 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 $34.1 million, down 8% year-over-year. After adjusting for the negative FX impact, our revenue was down 3%, which was driven by lower local deals and getaways. Our earnings per share this quarter was $0.09, which is lower than the prior-year period due primarily to the significant increase in spending on member acquisition, marketing and products. Our members grew 4% year-over-year and our social media followers and mobile app downloads continue to increase.

Slide 4 highlights our revenue by segment. Revenue in North America was $23.7 million, representing a year-over-year decrease of 6%. Revenue in Europe was $10.3 million, representing a year-over-year decrease of 12%. However, after removing the negative FX impact of the euro and British pound, the Europe revenue increased by 1%.

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 $1.5 million. $900,000 was due primarily to lower voucher sales for local, $100,000 was due to lower search spend, and $500,000 was from travel driven by the transition from voucher sales for getaways to the hotel platform where we recognized revenue later.

In local, voucher sales coming from push promotions have decreased as we have focused on deals that are available on a pull basis. Given that the year-over-year negative FX impact on Europe revenue was approximately $1.5 million, Slide 6 presents the Europe year-over-year revenue on a constant currency basis and shows that the overall Europe revenues increased by 1%, or by $116,000, due to travel and search increases totaling $391,000 driven by increases in airline and vacation package revenue offset by a decrease in local of $275,000.

Slide 7 provides a breakdown of our operating income. We had $2.6 million in overall operating income. North America had $2.5 million of operating income, and Europe had $100,000. The operating income is lower year-over-year due to the $3.5 million increased investment in our member acquisition, marketing and product development. We continue these investments despite lower revenues related to our product transformation, and therefore this lower operating income during the quarter.

In addition, the operating income was higher in the US compared to Europe in the current quarter as our increased marketing spend was weighted more towards Europe.

Our taxes represent taxes at the US federal and state tax rates on the US income as well as the tax manner recorded in the quarter, impacting this quarter's EPS by $0.01.

Slide 8 shows the cost of revenue and operating margin. The cost of revenue as a percent of revenue increased year-over-year and quarter-over-quarter. This was driven primarily by an increased portion of our revenues that were syndicated through our partner network, which comes with the related partner costs. Operating margin was lower primarily due to our increased investment in MEM acquisition, marketing, and product development.

Moving on to Slide 9, our overall operating expense was up by $700,000. North America operating expenses increased year-over-year by $800,000 due primarily to our effort to improve productivity offset by the planned increase in member acquisition, marketing and product. Europe operating expenses were up by $1.5 million, driven by our planned increase in member acquisition, marketing and product development, offset primarily by the positive FX impact on expenses.

Slide 10 shows that our headcount decreased this quarter by 15 employees. Productivity continues to improve year-over-year, but decreased slightly this quarter as our second-quarter revenues are typically lower than revenues in the first quarter due to seasonality.

Turning to Slide 11, this shows our DSO was higher due primarily to an expected longer collections cycle from one of our new partners in search. We generated positive operating cash flow this quarter and our cash position was up from $54 million last quarter to $55.3 million in the current quarter.

As a reminder, much of our cash is held in the non-US locations and 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 decline, as expected, yet the majority of the decline was due to FX and the remainder was from the expected declines in getaways and local. Second, we increased our investments in member acquisition, marketing and product development by $3.5 million, which lowered profit for the quarter. And third, our cash position remains solid.

Looking forward to our third quarter, 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 negative impact of FX rates, all of which are expected to persist. The impact from the FX rates are expected to increase in the third quarter. The euro is currently down 20% year-over-year, the British pound by almost 10%, and even the Canadian dollar is currently 17% lower than a year ago.

In addition, we expect, as in past years, that our third and fourth quarters will be seasonally slower quarters. Therefore, we expect lower revenues during these quarters compared our first and second quarters.

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 an incremental $500,000 of product spend. In addition, we expect to maintain increased levels of member acquisition and marketing costs over the next several quarters, and we will moderate this investment subject to the performance of our business.

In summary, we expect to generate lower operating income year-over-year and potentially operating losses driven by our investments. However, we are taking steps to control noninvestment area costs and are focused on increasing productivity of our resources.

This concludes the financial summary of our second quarter of 2015. So now I will turn it over to Holger or so he can provide an update on Travelzoo's strategy.

Please turn to Slide 14. Our growth strategy continues to be built on two pillars. On one end, we are looking to grow our audience and in particular the number of members as shown on the X axis. We have added almost 2 million new members over the past two quarters. At the same time, we are looking to enhance 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 or 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. Four quarters ago, we have revamped our efforts in growing our member base more rapidly than in the previous two years. We've increased investments into acquiring new members via marketing and 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 provides more details. In the quarter, we increased member acquisition and related marketing spend by roughly $3 million over the same quarter in the prior year and particularly increased investments in Europe this time. We plan to continue these investments and we are also planning to further test various off-line campaigns. Provided that we meet our internal revenue and profit expectations, these planned investments will continue to affect earnings per share but we are starting to see some positive impact on revenues from this strategy. As I mentioned on the past two calls, we are now focusing more on quality of new members rather than sheer quantity.

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 would 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 is a large growth opportunity to serve our users and 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 simple to use. In particular, we have launched our hotel platform which allows users to find deals anytime and book them easily on any device. We relaunched that capability on our website and our mobile site during the first quarter and have significantly grown the number of hotels on the platform during the second quarter. Once again, revenues from the platform increased quarter-over-quarter but as you can see on the bottom right side of the page, moving hotel transactions from vouchers onto the hotel platform comes with a delay in revenue recognition.

Sales of vouchers for hotels are recognized at the time of sale but net revenues from bookings on the platform are only recognized after the hotel stay has been completed. This is increasingly shifting revenues into the future. When we look at revenues in the years for example that we generate from hotels, in the past, 100% of those revenues were recognized during the quarter when a member booked a hotel. Today, approximately 15% of hotel transactions that occurred in the second quarter are only recognized as revenues in the future. And we believe, as the hotel platform continues to grow, that this percentage is likely to increase further.

On Page 19, let me talk about our local deals products. Like all others in the industry, we are seeing a shift in consumer habits. They purchase deals for restaurants, spas 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 several ways.

On one hand, we are increasing the number of deals that are live on our sites on our apps which can be purchased over time. And 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 relatively rigid voucher format. Mobile purchases and what I would call pool purchases continue to increase year-over-year as a percentage of total sales.

Turning to Page 20, we are proud to be the leader, 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 the Four Seasons Hotel or dining at the 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 for long-term success.

Let me summarize our management focus again on Page 21. Maintaining and even strengthening our quality content leadership is crucial. We intend to resume topline growth in multiple ways via products that may 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.

Now back to the operator.

Thank you. The floor is now open for questions. (Operator Instructions). Dan Kurnos, Benchmark Company.

Good morning. I apologize if I missed this. Let me just start quickly with a housekeeping question for Glen. Typically, at least in the past few quarters, you have given us directionally how things are pacing in the forward quarter. Did you provide any color on that in your prepared remarks, Glen?

I thought we did. We expect the declines to persist, consistent with the last several quarters.

Okay. And no additional color beyond that? Thanks. I must have missed that. And then Holger, for some high-level questions, just on the new member acquisition, I guess I know we always ask for this kind of data. Is there anything you can update us on in terms of sort of reconciling sort of new member acquisition and the fact that total un-duped subs were remaining flattish? You've talked about focusing on higher quality subs, so anything that you have in terms of stickiness, repeat rates, lifetime value? Anything that you could add from sort of your learning so far with the increased marketing spend would be great. Thanks.

We are looking into what more data we can share there. It's also that we are -- one thing to understand is, on the one hand, we also have of course members that unsubscribe, but then we also have members that over a long period of time we see that somehow they are not responding that much anymore, and other members are changing emails. And they change their emails without sometimes unsubscribing. So there are some factors also where just, over time, we are unsubscribing members ourselves not based on their request because these technical unsubscribes and these have actually been a little bit higher this quarter in Q2 as we use the opportunity of these new members that we have added in the past quarters to increase a bit these technical unsubscribes. But overall what that means is that our member base is increasingly active. In fact, when we look at some of the engagement levels in the second quarter, those are some of the highest levels that we have seen in quite a while. So I understand you want to see some more concrete details, and we are currently looking at what we can share on an ongoing basis.

Yes, that was going to be the second part of my question there, Holger. So it's good to sort of get at least sort of your -- a little bit more color on whether there is some intentional churn from your site or how that's pacing. I'm sure you guys will provide us with more data once you have it.

Can you just talk a little bit about the shift to syndicated deals, the impact on COGS, if that's going to continue going forward and how that sort of plays into the overall business plan?

Yes, I'll let Chris answer that question, but we just point out this quarter was really characterized by a couple of things that really makes the financial picture look worse than it is. On the one hand, and Glen pointed it out, the exchange rate which really cut revenues down by 5%. And then we stressed it again the effect of hotel bookings on the platform, which really move revenue into future quarters. And then the Canadian dollar is now dropping. So taking that all together, if these things -- if we actually reported in euro and not in US dollars, we would show a significant growth. So overall the quarter looks I think -- is actually better than it looks at first sight. But let me moved to Chris. Let me hand over to Chris now to answer the question on syndication with our partners. Chris?

Dan, can you repeat the question on syndication please?

Yes. I was just curious on the impact of if there is a strategic decision to move more towards a syndicated model. Obviously we saw the tick-up in COGS as a result this quarter, and if that's going to persist and just how you think about how that plays into your overall strategy.

We've been running a syndication business for about seven years now. So the LA Times, Chicago Tribune run our deals.

More recently, two opportunities have presented themselves. One is looking at what our members are looking at on our site, and then introducing them to those destinations on other sites to data. The second is actually Facebook. Because we have got such an enormous audience -- I think we are the second largest travel brand on Facebook behind Expedia worldwide -- we are able to talk to our members on Facebook, and we are testing right now both of those models. And that's why you saw an impact on the margin. I'm not sure if that continues or not because we just completed the testing phase there now.

Yes, I guess it was for --

It's definitely not a strategic change. So it's probably more a result of people responding more to our deals. And actually sometimes you work with these publishing partners, and if they are happy, then they put us in more placements and more sites, and that's increasing, but it's not -- it's something they're very happy about but it's not necessarily something that we are putting a strong, strategic emphasis on.

Okay, that's helpful. I just wanted to make sure it wasn't a strategic shift to maybe go after more partner distribution. Thanks for the clarity on that then.

And then just I guess lastly for me, I'm assuming some marketing spend is a portion of the sales and marketing line. If we are assuming that's constant, it's a pretty big headcount decrease. Obviously the quarter even looked even better I think than we were anticipating due to the reduction in G&A. And I'm assuming sales and marketing down quarter-over-quarter came from reduction in sales commission. So just how much excess fat you think you have to trim on the headcount front at this point? And when do you start getting more aggressive in building out net people I guess when you have that platform that you really want to start monetizing better?

It's not really -- it's not really something where we have any specific targets. You'll remember that I came back on board as Executive Chairman a year ago, less than a year ago. And one of the areas that's definitely important to me is to run this company efficiently. And I think the entire team and every person who works for Travelzoo has really contributed over the last couple of quarters in what we call internally raise the bar. It's really how can we do the same things with less resources, and how can we also be more performance-oriented?

Like every company, we have fantastic players and we have some weaker players, and we want to continue to grow the strong ones. And if someone doesn't perform, then it doesn't make sense to keep them forever. So, it's something we will continue to do, but I wouldn't necessarily talk about any excess fat.

I also think our bigger focus is really bringing the Coming back to growth. That's my biggest ambition. How can we bring the Company back into a gross mode because we don't want to be a company that is continuing to report declining revenues. And we have a lot of product improvements in the works, not so much that people can see it, but we are working on a lot of things internally, testing a lot of things. I think that we'll see a lot of these things coming out in the second half of the year.

I'll probably bug you a little bit more about that off-line. Thanks for the color. I'll step aside and let some other people ask some questions.

Ed Woo, Ascendiant Capital.

Yes, thanks for taking my question. I had a general question about the travel industry. How are you seeing things out there and is there any big differences in how the industry is doing in the US versus international?

Chris, do you want to take that one please?

Sure. It's a story of many different areas. So New York City is massively oversupplied right now and we are seeing tons of deals in that market. On the air side in North America, the business is very robust. The price of oil is helping on the pricing. So we are seeing deals but the airlines are reasonably full.

Destinations seem to be quite bullish at the moment. They are spending quite nicely. In Europe, the UK, the UK is robust. I'm actually here right now and I'm just shocked at how many people are even visiting London. And the rest of Europe is rather obviously a concern. But the Germans still travel, right? So given that our Eurozone is primarily our German market, I don't think we see much of an impact from the weak euro.

Great. It seems like, on an FX neutral basis, you guys did a lot better in Europe versus North America. Was there anything specific about that?

Chris? I have to say by the way before Chris response to that, I have noticed in Europe this year really a massive amount of American tourists as you can expect with the euro being so weak. A lot of Americans have decided to go to Europe, and we have quite an audience in North America. So as these people are looking more for deals in Europe, that obviously will also help European revenues. Like some people decide to go to Europe this year rather than doing a domestic vacation or going to Hawaii or the Caribbean because I spoke with a few people who felt like wow, now is the opportunity to go to Europe and take a big trip because it's as cheap as it's been in more than 10 years.

If you actually dig into the numbers, Holger had a slide in there that talked about 15% of the hotel revenue is delayed until a future period. That is only happening in the United States right now. It's not happening in the UK and Germany. So if you took that 15% back, I think the picture in the United States would in fact look a lot prettier. Obviously, we are not excited by the fact that it would be flat, but it's still a lot better. We had some challenges with some tour operators, but we've really turned that situation around now and that was in the United States.

And on the cruise side, it's funny. In the United States, we have more demand than we can handle in cruise, but then in Europe, we actually have less demand than we can handle because a lot of the cruise lines moved their ships out to the Caribbean given the fears in the Middle East and so forth. So I wouldn't say the North America picture is as bad as the numbers paint, given that revenue delay.

Great. And then the last question I have is on the hotel platform. It definitely looks like you guys have increased the amount of availability of different products on the platform. Are you at a point now where you think your platform in the US is in pretty good shape, and what about plans for international expansion?

We are much happier with the content, as you say yourself. In fact, response from people who have been using the hotel search and searching for deals by date have been quite pleased. We are still making a couple of adjustments to (technical difficulty) win deals on all the other to communicate that properly. But overall yes, it's something we intend to promote much more aggressively and make it more visible on the homepage fairly soon.

With regards to international rollout, yes, we will do that. We will do that actually quite quickly after we are confident that the product is good and well received in North America. Obviously, it would be foolish to roll something out internationally, particularly in an aggressive manner, if the product hasn't proven in North America. But we are quite happy with the response. We are seeing quite good conversion rates in the markets where we have now good content. And people tell me wow, I'm really surprised, what a fantastic deal I found on Travelzoo with this hotel search. So we are quite happy about it.

Great. Thank you and good luck.

Tom White, Macquarie.

Thanks for taking my questions guys. Maybe just two or three if I could. Just firstly on -- I was hoping you could maybe just kind of comment on what you're seeing in terms of the efficiency of your subscriber marketing kind of by channel. I guess I'm sort of curious if -- whether the ROIs you guys are seeing in the various channels you spend against are sort of stable? Are they improving? Are they declining? And sort against that backdrop, maybe just talk a bit more about the decision to move more into off-line marketing. Kind of what's driving you guys to explore that?

There's not a lot of detail that we can provide actually because we are still also testing a few things. The one thing we can see, what we are seeing that off-line we are acquiring members at higher costs but the quality of these members is also better. That seems to be learning so far that we've done. We haven't made that much in off-line, so we have to continue to work on that, but the initial results are quite positive.

Okay. And then Holger, you hinted at some interesting things in terms of the product roadmap. I don't want you guys to give anything away that you are not ready to yet, but any kind of color you can give around maybe just types of new products or types of new tools or functionality that you guys are working on?

It's really not so much about anything new. I've been saying for a couple of quarters now I am very keen on making our products more searchable so when a member user comes to our site and mobile -- and mobile is now on the verge of being over 50% of our traffic. When people come, I want them to easily find what, where and when they need it. The website and the mobile site doesn't do that well right now. Our app is getting increasingly better, but that's really the prime -- that's really the prime thing that we are working on in making this, creating this in a way that it's really simple and easy to use for our users.

Okay. And then just lastly, when we think about sort of the lag in the revenue recognition between the voucher business and kind of the more marketplace driven business, I think some of the other OTAs kind of talk about that booking window as sort of days and weeks, not months. I guess any sort of color on what we should expect or what sort that booking window looks like for you guys?

I'll let Glen respond to that.

It does vary by quarter, but it's not a matter of days. So we will do deals through our booking engine and push those out and they can be used and people can access and book those many weeks in advance.

So, I think what we're trying to communicate is, through this transformation, before with the getaway vouchers model, we recognized all the revenue when we did the sale. And then people would book through the hotel and later stay. And our revenue is recognized all upfront there versus this booking platform, this hotel platform that we are using is just upon stay. So that's what we are trying to highlight. The differences is where we used to get it all upfront, now some of it is pushed to the next quarter. But we are not talking quarters away. It's rolling into the next quarter, the majority of it.

Okay. That's helpful. Thank you.

There's an important distinction on our business versus the major OTAs. We are still predominantly a dealers business. So we send out that deal, we give specific data you can stay on. And that could be 60 days out, 45 days out. There's very different behavior to you going to an OTA and saying I need a hotel tonight or tomorrow night. And so window washing probably will be longer than the others, given the nature of our business.

Okay. Thanks.

Thank you. I would like to turn the conference back over to Mr. Holger Bartel for any further remarks.

Thank you, everybody, for joining us today. We look forward to speaking with you again next quarter. Bye-bye and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.