Travelzoo (TZOO) 2016 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Travelzoo second-quarter 2016 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 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 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 accompanied 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 90 minutes after the conclusion of this call.

Now it is my pleasure to turn the call over to 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 second-quarter 2016 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 start off and 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 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. These results include, in the current and prior periods, the financial results of the Asia-Pacific business that we acquired in August of last year.

Our revenue for the quarter was $34 million, down 7% year-over-year, which is down 6% in constant currencies. Our earnings per share this quarter was $0.14, which is $0.08 higher than the prior-year period. Our members grew to 28.9 million, and our social media followers and mobile app downloads continue to increase.

Slide 4 highlights our revenue by segment. Revenue in North America was $21.9 million, representing a year-over-year decrease of 8%. Revenue in Europe was $9.7 million, representing a year-over-year constant-currency decrease of 2%. And Asia-Pacific revenue was $2.4 million, representing a year-over-year constant-currency decrease of 10%.

The next few slides cover further detail of our revenue for each of our three segments. Slide 5 shows North America year-over-year revenue decreased by $1.9 million. $1.5 million was due to lower voucher sales for local, as we focus less on pushing these deals out and now have more of them available on a pull basis only. And million was from travel, primarily due to the elimination of unprofitable business activities.

Turning to slide 6, there was an approximate $340,000 negative FX impact on Europe revenue. Europe year-over-year revenue on a constant-currency basis shows that overall Europe revenues decreased by 2%.

The constant-currency decrease of approximately $200,000 was primarily due to lower search revenue from less search traffic acquisition spend. This was offset by our travel business growth in constant currencies by 2% year-over-year.

On slide 7, Asia-Pacific year-over-year revenue decreased by approximately $300,000 as we made changes to our sales team in various countries.

Slide 8 provides a breakdown of our operating income. We had $3.8 million in overall operating income. North America generated $3.2 million, and Europe generated $1.8 million, which were both increases year-over-year.

Asia-Pacific recorded an operating loss of $1.2 million, which increased year-over-year due to our planned increased member acquisition spend. Despite lower revenue, net income increased year-over-year as we operated smarter.

Slide 9 shows the cost of revenue and operating margin. Cost of revenue as a percentage of revenue was down year-over-year and sequentially due to lower syndication revenue and voucher sales. Our operating margin percentage increased year-over-year as we gained more operating efficiencies.

Slide 10 demonstrates our progress on managing costs. Operating expenses in both North America and Europe declined year-over-year. There was an increase in Asia-Pacific's year-over-year cost due to the planned increase in member acquisition spend.

Our product development costs were down this quarter, driven by capitalization of selected project costs as well as a shift of some projects to future quarters.

Slide 11 shows that our productivity was up slightly year-over-year and sequentially.

Moving on to slide 12, DSO was up year-over-year, as expected, from our search partner and a longer cycle for our Asia-Pacific business. We generated positive cash flow during the quarter and repurchased $3 million of our stock, exiting the quarter with a solid cash position of $27.6 million, of which $16.2 million was held outside the US.

Turning to slide 13, in summary for our revenue, the majority of revenue declines were driven by planned reductions in local search and syndication revenues as well as negative FX. We saw improvements in profitability as well as our operating costs have come down, driven by our continued focus on operating smarter. And we have a solid cash position after continuing to repurchase stock.

Looking forward to our third-quarter 2016, 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 including declines in getaways, local, and search, as well as the elimination of certain unprofitable travel business activities. We also expect a continued negative FX impact.

In Europe, we expect trends to worsen given the traveler security concerns. We expect the third quarter to be seasonally lower than Q2, and we expect to continue member acquisition at the increased levels of 2015.

We plan to increase investments in our new Asia-Pacific segment, in particular in China, which will reduce year-over-year EPS by approximately $0.06. In addition, we plan to continue product development, compliance, and efficiency initiatives and expect to incur additional professional service costs of $800,000 sequentially.

In summary, given these trends and investments, we expect to generate lower operating income year-over-year and quarter-over-quarter. However, we are continuing to take steps to control noninvestment area costs and are focused on increasing the productivity of our resources.

This concludes the financial summary of our second quarter of 2016. Now Holger will provide you an update on Travelzoo's strategy.

Please turn to slide 15. 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 pace 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 want to help them when they are 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 16 highlights how our investment priorities are aligned with these two pillars of our strategy: growth in audience and improvement of our products. First, we continued our increased investment in acquisition of new members during the quarter. We added 900,000 new members, and we increasingly leveraged our strong social media presence.

We also have increased our investments in Asia-Pacific. The new members are expected to yield benefits to our business for years to come.

Second, we have been working to enhance our products to be more mobile-friendly and to enhance usability so that members can more easily find what they are looking for. We have made our emails easier to read on all devices, and we have begun testing our new responsive site with select members, as the redesigned site makes it much easier for anyone to find deals where and when they need them. Early feedback is promising.

Third, we continue to enhance our hotel platform for date-specific hotel searches. We have had this live in the US for a few quarters now, and have begun to communicate to our members more actively that they can find hotels just exactly when they need them. As searches and conversion rates are increasing, we are pleased that the number of hotel bookings continues to grow year-over-year.

Slide 17 provides more detail on this. The number of hotel searches has almost doubled in the past 12 months and has been strong so far this quarter. Revenues from our hotel platform are also increasing, but they are affected by seasonality, as we recognize commissions only after the hotel stay has been completed and not as we do in the case of voucher sales, at the time when a member purchases a voucher.

On slide 18 I'd like to highlight our progress in the area of social media and marketing. We want to get the right deals to our members in whichever form is best for them, whether on their mobile phone or 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 19, we are proud to be the quality leader in this business. Day after day, our staff selects, researches, and negotiates, and validates the very best deal. Whether it's a vacation at the Four Seasons Hotel, like in Hawaii, or dining at a Michelin Star restaurant, our focus is always on quality.

Our Test Booking Centers ensure that the 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 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 20. 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.

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. Now back to the operator, Michelle.

(Operator Instructions) Tom White, Macquarie.

Great; thank you for taking my question. I guess just first on your comments about the European travel, I was hoping to maybe get a bit more color there. I think a few weeks ago you guys published -- put out a press release talking about no elevated cancellation rates as may be the result of Brexit or terrorism. I guess trying to reconcile that with your comments about 3Q.

Are you guys starting now to see maybe a ramp in cancellations or any other changes in booking behaviors from European travelers that you could call out? And then I've just got one follow-up on guidance.

Hi, Tom. Yes, it's not so much cancellations; but yes, these very horrific and very saddening terror attacks in Europe certainly affect our business. We've seen that in Q2, and we expect to see probably even more of an impact in Q3 and Q4. It depends on what happens and how this trend continues.

The way it affects us is in two ways. On the one hand, places where terrorist attacks occur -- in particular, places like Turkey or France or now also in Germany -- travel advertisers don't want to advertise these destinations. So, yes, we are losing, on the one hand, advertising revenue from advertisers who previously promoted destinations like Turkey.

Would say a year or two years ago Turkey was probably one of the most popular destinations promoted in our UK Top 20; now it happens very rarely. Also, of course, at this time we don't want to go out and all of a sudden recommend with thousands of deals to our UK members to go to Egypt, if this is a dangerous place to travel to at this time.

On the other hand, travelers -- and probably that trend also affects most of the travel companies. We heard this morning from Thomas Cook seeing quite a decrease in bookings in places like Turkey and some of the popular UK travel destinations.

So what's happening is that people, now, they still want to travel, and we haven't seen an overall decline in traveling. But people travel to places that they consider safer.

So places like Spain and Portugal are more popular this summer. And that means it's a bit more difficult for us to find deals there. So advertisers obviously want to promote them, but the deals are not as strong.

Good news is that more people from Europe want to travel to the US, so US we have a very strong business. So there's a good opportunity now to promote more US travel deals to our audience in Europe.

But net-net, I would say, yes, we are certainly impacted. But also in the spirit of everyone, we just hope that this series of terrorist attacks is calming down and not continue at the level we have seen in the last week.

Great. Then I know I said my follow-up would be on guidance, but I changed my mind. The stats around date-based search that you gave on slide 17, can you give us any sense about what percentage of, say, your North American travel revenue today comes from commissions from bookings like this? And I understand the different revenue recognition, but just curious about what it is today, maybe how you think that will look maybe exiting the year and then maybe a couple years out.

Is this going to drastically change the composition of your North American travel revenues over the next few years? Or is it going to be just a complement to the core business? Thanks.

Yes, I'll let Glen answer that, but just a quick note before Glen jumps in. Hotel is obviously only a part of our business. We have a big business in vacations, tourists, tourism boards and so forth. Hotels is only a part of our revenues. And then again, commissions on hotels are again just a part of hotels.

So just let's keep that in mind. But Glen, do you want to take this?

Yes. Hi, Tom. Not a significant portion right now and I wouldn't expect it to be dramatically larger by the end of the year. As you remember, there's a few reasons why we got into this business. One was just with those trends on mobile we wanted a solution that we could give our members a good experience on the hotel deals that we present.

So in one vein, nothing's changed; we're still presenting really amazing hotel deals. It's just the way we're presenting that is different, and the way we're monetizing that is changing.

There's, I would say, a gradual shift from our advertising and the voucher-based hotel products to this hotel platform.

The reason why we see this as an opportunity is not so much only on the revenue front, Tom, but also on the bottom line, because people are booking deals that we already have. We have a relatively fixed cost infrastructure in place for the platform. So as this business scales -- and then also these are members who are booking hotel deals, so we don't have any additional incremental marketing cost associated with it. Given all these things, this is a business as it grows, as it continues to grow and as it scales, it has a very high incremental margin for us, which makes it attractive for us.

Understood. Thank you.

Ed Woo, Ascendiant Capital.

Yes. Thanks for taking my question. Going to the guidance, you did mention that you guys are going to continue to get out of some unprofitable products and whatnot. When does the comp get easier?

I know you guys have been trimming down in some of your search areas, some of your local areas over the past year or so. So just curious in terms of when the comps will get easier.

Glen, do you want to respond to that? Ed, certainly we want to have this business be in a position where it grows year-over-year. So, yes, we know we have gone through some efforts to eliminate activities that just really didn't make any sense.

And as you see, in spite of the revenue decrease we have had year-over-year, our operating margins have improved quite significantly. If I look at just the operating margin for Europe and North America, we're now well about 10%, so that's great.

But of course we want to bring back growth as well. It's a little difficult to say when that will occur. It's clearly our intention. We clearly have a plan for that.

How long it takes is difficult to answer. So far it's been taking a little bit longer than we were hoping for. But also keep in mind I just took over as Global CEO at the beginning of this year.

But, Glen, do you have anything to add?

Yes. No, I think you covered most of it. I would say, Ed, we're probably not in the ninth inning, right? And so we still have some work to do.

But I think the progress that we're making, and making the right trade-off choices, and getting us in a position to where we can get in that mode we're pleased with. Right? But it would be hard to predict at this point.

All right. Then second of all, you mentioned that you're going to continue your investment spending on customer acquisitions. You guys added a good amount of customers this quarter.

Will your focus be on increasing growth specifically in China, Asia market? Also in terms of -- what do you think did well this quarter to get the 900,000 new customers?

Yes, China will be an area where we will increase investments over time. You have to keep in mind that the marketing team in China, Asia-Pacific, Travelzoo Asia Pacific, was a completely independent and separate business. So they didn't really benefit much from all the learnings that we had made at Travelzoo in Europe and North America about what's the best way to acquire members.

Then also China is obviously a very different market than North America and Europe. One thing that's clearly very different is that the amount of people who use -- North America, yes, it's still very normal to use an email address to sign up for something; in China you really sign up with your mobile number. So there's a few differences, and it's probably going to take us a couple more quarters to learn exactly how to run it most effectively, member acquisition in China.

But as we learn that we will likely increase our investment there. And, it's actually a market that has responded very well to our offerings, so we're very happy about it and that's why we're so -- why we're really optimistic about China.

And, last but not least, the Travelzoo team in China has really built quite a good reputation for the brand. So we have a very good brand name in China.

It's still small. We're not that well known yet. But those people who know us and also the travel industry have a lot of respect for us. We're quite well positioned there.

Great. Well, thanks for answering my question and I wish you best of luck.

There are no further questions. I'll now turn the call back over to Mr. Holger Bartel.

Great. Thank you, everyone. So ladies and gentlemen, we look forward to speaking with you again next quarter. Thanks and have a great day. Bye.

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