Travelzoo (TZOO) 2015 Q4 法說會逐字稿

Good morning and welcome to the Travelzoo Fourth 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 for questions following the presentation. Today's call is being recorded.

Before I introduce 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 provisions of the Private Securities Litigation Reform Act of 1995.

Actual results could vary materially from those contained in the forward-looking statements. Factors that could cause actual results to vary from those in 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 publically 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 review 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 call over to your host, Holger Bartel, Travelzoo's Chairman and Global CEO. Sir, you may begin.

Thank you, Operator. Good morning and thank you, all, for joining us today for Travelzoo's Fourth Quarter 2015 Financial Results Conference Call. I'm Holger Bartel, Chairman and Global CEO of Travelzoo and joining me today is Glen Ceremony, the company's Chief Financial Officer. Glen will walk you through today's format.

Thank you, Holger and everyone for joining us today. For the format of today's call, I will review our fourth 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. These results include in the current and prior periods the financial results of the Asia-Pacific business that we acquired in August. Our revenue for the quarter was $32.1 million, down 6% year over year or down by 3% in constant currencies. Our non-GAAP earnings per share this quarter was $0.03 which is $0.16 higher than the prior year period. Our members grew to over 28 million and our social media followers and mobile app downloads continue to increase.

The next few slides provide a view on our financial progress over the last few quarters. Vast changes in foreign currency exchange rates and our investments in member growth and product enhancements have been overshadowing some of the positive trends.

Slide 4 demonstrates the steady progress that we are making on revenues, cost, and profitability. Year over year revenue growth and constant currencies improved over 10 percentage points. Similarly, year over year changes in operating income and EPS have improved steadily.

Slide 5 highlights that this improvement is despite our increased investments in audience and product development as we have been focused on operating smarter and increasing margins in order to help fund these investments.

Slide 6 demonstrates that revenues from our core travel products have begun growing again in constant currencies. These revenues represent 70% of our business. However, the sales of local deals, vouchers, as well as SuperSearch and Fly.com products continue to experience revenue declines that offset the progress we are making in our core.

Slide 7 gives a bit more detail on the revenue by segment, in particular the negative impact to the year over year amount given the persistently strong US dollar. This quarter we had an overall unfavorable foreign currency impact of $1.1 million. This negative impact masked the constant currency year over year growth we had in Europe of 5% and stable revenues in Asia-Pacific.

The next few slides cover further detail of our revenue for each of our three operating segments. Slide 8 shows that North America year over year revenue decreased by $1.8 million. $900,000 was due primarily to lower voucher sales for local as we have focused less on pushing these deals out and now have more of them available on a pull basis only. $400,000 of the revenue decline was due to lower search spend and $500,000 was from travel, due primarily to the transition from voucher sales for getaways to the hotel platform where we recognized revenue later. Given the strong US dollar, over $300,000 of the North America US dollar revenue decline was due to the negative FX on our Canadian revenue.

Turning to slide 9, there was an approximate $750,000 negative FX impact on Europe revenue. However, Europe year over year revenue on a constant currency basis shows that overall Europe revenues increased by 5%. The increase of $500,000 was primarily due to revenue increases from hotels and vacation packagers.

On slide 10, our third segment, Asia-Pacific, shows that we had stable year over year revenue in constant currencies. In terms of US dollars, we recognize negative FX impacts of approximately $200,000.

Slide 11 provides a breakdown of our operating income. We had $1 million in overall operating income. North America had $400,000 of operating income and Europe had $1.5 million. These were offset with Asia-Pacific's operating loss of $900,000. Overall operating income improved by $2.6 million year over year despite continued investments in our member acquisition, marketing, and product development.

Slide 12 shows the cost of revenue and operating margin. The cost of revenue as a percent of revenue was stable and our operating margin percentage increased year over year as we gained more operating efficiencies.

Slide 13 demonstrates our progress on controlling costs relative to revenue. Operating expenses as a percent of revenue in both North America and Europe declined and there was a slight increase in Asia-Pacific costs as a percent of revenue due to our increase in member acquisition spend relative to pre-acquisition periods.

Slide 14 shows our continued improvement in our productivity year over year with an expected sequential decrease due to seasonality.

Moving on to slide 15, DSOs are slightly up year over year as expected from our search partner and a longer cycle for our Asia-Pacific segment and during our fourth quarter we generated positive cash flow and continued our stock repurchase under the existing program, repurchasing $1.6 million of our stock and we exited the quarter with a solid cash position of $35.1 million of which $21.3 million was held outside the US.

Earlier today we announced the board authorization of a new repurchase program for up to 1 million shares of our common stock which management is authorized to execute from time to time in the open market and will be funded from our available cash. The number of shares to be purchased and the timing of the purchases will be based on the level of our cash balances and particularly in the US. The general business and marketing conditions and other factors including alternative investment opportunities.

Turning to slide 16, in summary for our revenue, Europe revenue grew in constant currencies offset by negative FX. North American revenue was lower due to search and local and we saw positive trends in our core travel products. In addition we had large improvements in profitability over the previous period and operating costs were down across all segments give our efforts to manage costs in order to fund our continued investments in member acquisition, marketing, and product development. And finally, our cash position is solid with an increase this quarter from our operating cash flow.

Looking forward to our first quarter 2016 we expect the following. We expect the positive trend in revenue growth from travel products across all products to continue and improve to a gain of 2% to 5% in constant currencies. We expect this growth to further accelerate in Q2 and beyond with the continued ramp up of hotel search revenue.

We expect our search revenue in North America to decline year over year by 30% to 40% as we are proactively pulling back on spending on traffic for these products due to the limited opportunities for spend at profit levels that meet our requirements. We also expect product related changes in search to impact EPS negatively by $0.03 to $0.05 in the first quarter. We expect revenues from local voucher sales to continue to decline around 15% with a more positive outlook for the second half of the year as we make our products and apps easier to search.

We expect a continued negative impact from currency trends. At January FX levels, the negative impact on our revenues in Q1 would be a minus $800,000 to a minus $900,000. We expect to continue member acquisitions at the increased levels of 2015 and we plan to increase investments in our new Asia-Pacific segment, in particular in China. Our investments in Asia-Pacific member acquisition are expected to reduce EPS by $0.05 to $0.10 in the first quarter. In addition, we expect to incur additional professional service costs of $500,000.

In summary, given these trends and investments we expect to generate lower operating income year over year, however we're continuing to take steps to control non-investment area costs and are focused on increasing productivity of our resources.

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

Please turn to slide 18. Our growth strategy continues to be built on two pillars. On one hand we are looking to grow our audience together with our Asia-Pacific business. We now have over 28 million Travelzoo members worldwide and that base continues to grow. At the same time we are working 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're actively searching for something specific like a hotel room on a certain date. We believe that these product enhancements will result over time in higher revenues per member.

Slide 19 provides highlights on our investment priorities and how they're aligned with these two pillars of our strategy, growth in our audience and improvement of our product.

First, we increased our investment in acquisition of new members during 2015. Our focus is to add high quality members, explore ways to leverage our strong social media presence and to test some offline marketing channels. We have seen the strongest gains in Europe where revenues are now growing again after many quarters of decline. These new members are expected to yield benefits to our business for years to come.

Second, we've been working to enhance our products to be more mobile friendly and to enhance usability so that members can find more easily what they are looking for. A lot of work is underway in this area. We have improved our apps and we are actively testing our new simpler search. We've also made our emails easy to read on all devices and we've tested ways to deliver more relevant content to our members based on their likes and dislikes. All these improvements are showing promising results.

Third, we continue to enhance our hotel platform for date specific hotel searches. We've had this live in the US for a few quarters and now we are beginning to communicate to our members more actively that they can find hotel deals exactly when they need them through Travelzoo. As searches and conversion rates are increasing, we are pleased that the number of hotel bookings continues to grow. In fact, slide 20 provides more details on this.

Bookings on our hotel platform have more than doubled in the past 12 months and have been strong so far this quarter. Conversation rates are also rising. Revenue growth however, as we see on the left, comes with a delay as we only recognize commissions after hotel stay has been completed and not as we do in the case of other sales at the time when members purchase a voucher.

On slide 21 I would highlight our progress in the area of social media and marketing. It is important for us to get the right deals to our members in whichever form is best for them, whether on their mobile phone or via social network. Social channels such as Facebook in North America and Europe or Weibo in China, enable us to deliver our content beyond our traditional email delivery and our members find it fun to share great deals they find from us with their friends.

Turning to slide 22, we are proud to be the quality leader in this business. Day after day, our staff select, researches, negotiates, and validates the very best deals, whether it's the spa at the Four Seasons Hotel or dining at the Michelin star restaurant, our focus is always on quality. And our test booking centers ensure that the deals we publish are real and valid and not just bait and switch. We believe that our passionate focus on the very best deals and the very best places, drive loyalty in the long run and position us well for long-term success.

So, let me summarize our management focus on slide 23, maintaining and even strengthening our quality content leadership is crucial. We intend to resume top line growth in multiple ways, via products that make it equally simple for our members to search for offers, as to receive deals that inspire them to take a trip.

Revenues from our travel products, as Glen has pointed out, are growing again and we expect this trend to improve further. We also continue to grow the number of people who use us. We see a particularly promising opportunity in the large and fast growing Chinese travel market. But as we invest on both fronts, we would like to remain profitable.

This concludes our prepared remarks. So, now back to the Operator.

(Operator Instructions) Dan Kurnos, The Benchmark Company.

Great. Thanks. Good morning. Holger, you know, look, I will tell you that certainly we can see outwardly some of the efforts you've taken on the product side in terms of cleanup have at least made certain aspects more appealing, so kudos to you on getting this thing sort of moving in the right direction.

I guess my questions really center around maybe some of the other metrics here, and I know that you closely guard your user metrics and we've had this conversation in the past. But maybe in relation to my initial comments, if you could just give us directionally, you talked about the hotel platform on a more granular basis.

But within your other products and as you continue to evolve this platform into what sounds like more of a social experience, just what you're seeing in terms of either ROI trends on this heavy consumer spend or customer acquisition spend, I should say right now, and within your existing user base what you're seeing in terms of retention rate, churn, repeat rates and how that's trending since you've made some of these improvements? Thanks.

Well, thanks, Dan. Thanks for the compliment on our product improvements, which I think have really not even -- many of the things we are working on have not even seen the day of light, so we are very excited about the things that will be coming to our 2016, in particular the simpler search, improvements on hotels, changes to our website, mobile site to make them responsive and so forth. So, there is certainly lot more come later in the year.

With regards to user metrics, what we've generally done over the last couple of years is move more towards building an audience of higher quality. You might see that our acquisition cost for new members have increased. We are spending significantly more than three or four years ago. We are investing this in an attempt to grow our member base, which it is growing, but it's not growing at fast on a just a numeric basis as you might expect. This is because we are just putting much more emphasis now on acquiring those members that are active and are generating the most activity in revenue for us going forward.

With regards to user trends and metrics on other products, maybe you can help me, Dan, what else the most trends you would like to have more clarity on going forward?

You gave some good commentary around increased number of searches and conversion rates with the hotel product. So, I am just curious and I know that you guys are still in the early stages of your product revamp or replatforming essentially is what this is.

So, I'm just curious within your core products as you continue to spend on these high active users and really just trying get in to what the ROI trends look like on your customer acquisition spend and the new users that you're acquiring, plus your existing users, since you've gone through kind of some intentional churn in the past, how they're responding to the new product changes initially and if the trends are just generally improving from a conversion standpoint or if that's really still wait and see depending on what happens with our new product launches?

Yes. So, in the tests we have been doing with the product improvements we are working on we have seen actually quite significant improvements on conversions. I don't have any data right now to present to you, we didn't prepare this. But let us look into what we can do more in future quarters. So, that's good.

What that means is not only that we are generating more revenue from a user when they come to the site. What it also means and it's even more important that users now start finding things that they are looking for which they previously haven't, that's more important.

The effect of that is that the user will come back to the site because they were successful. The worse thing that could happen is if someone comes to us and we cannot help them, then chances that they will come back is much lower. We started recently working a little bit with 4C and what we found is that the net promoter score of our members is unbelievably high compared to some of our competitors. So, we certainly know that our members are very loyal. They come to us when they want something. But now with some of the improvement in search, they are much more likely to find what they are looking for.

Great. And then, just on the hotel side, if you could just talk about, I'll leave the macro for other people to ask about. But just in terms of specifically the alternative, we've seen an increase in alternative lodging with the rise of Airbnb, obviously Expedia talked about HomeAway and how that's kind of potentially changing the market dynamic.

And in addition, as the larger players, Expedia and Priceline, continue to aggressively add supply, they are also willing to take lower take rates, from their -- from the suppliers, give suppliers more of the cut. So, if you are seeing any impact on some of your higher quality partners, understanding that you don't have real huge supplier base build out yet, but just how you think about the dynamics in the marketplace changing the way you approached building out hotel supply on the hotel booking platform?

Yeah, we have now over 2000 hotels on the platform and I can tell you it's not so much the sheer number of hotels. In fact, yes, probably two years ago we had too little, but now in major cities and destinations we have sufficiently brought a range of hotels. What really matters more is the quality of the hotels and the deals that they are providing us and in the comparison shopping that we are doing on an ongoing basis of what we are offering versus what others are offering, we're actually doing quite well and that's what probably explains the increase in conversion rates.

On the hotel front, the take rate that the big companies, Expedia and Priceline, are taking from hotels is actually much higher than you might think, because in order to really get volume as a hotel you have to get on to this first page of results and its little bit like a Google-like bidding process. So, they have to pay quite expensively to be on that first page, particularly in times when they really need help because at that time other hotels need to help as well.

So, they welcome us very much as an alternative solution for this and for some of the hotels that are in major markets and have utilized us with some great offers during these times we have certainly delivered quite significant amount of bookings. So, that's encouraging. So, I don't -- I actually see our opportunity between the two giants, our opportunity is actually quite good because hotels don't want to be faced with such a massive concentration.

Got it. Great. Thanks for the all the color, Holger. I appreciate it.

Thanks, Dan.

(Operator Instructions) And this does conclude the question and answer session of today's program. I would like to hand the program back to Holger Bartel.

Okay, great. Thanks, ladies and gentlemen. Thanks for your time and support and we look forward to speaking with you again next quarter then. Have a nice day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.