Travelzoo (TZOO) 2017 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Travelzoo Fourth Quarter 2017 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 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, Holger Bartel, Travelzoo's global CEO. Sir, you may begin.

Thank you. Good morning, everyone, and thank you for joining us today for Travelzoo's Fourth Quarter 2017 Financial Results Conference Call. I'm Holger Bartel, the global CEO of Travelzoo. And as always, with 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 business initiatives. 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 to follow along with our prepared remarks.

Now let's turn to Slide 3, which provides the key financial highlights for the quarter. Our revenue for the quarter returned to growth and was $27 million, up 1% year-over-year in nominal terms. It was 2% lower if we apply constant currencies. Our diluted earnings per share from continuing operations this quarter was $0.05, slightly lower year-over-year, driven by the impact of our investments in Asia Pacific. Our members remain stable at 29.4 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 $16.2 million, representing a year-over-year increase of 2% or 1% on a constant currency basis. Revenue in Europe was $8.8 million, representing a year-over-year increase of 4% or constant currency decrease of 4%. Revenue in Asia Pacific was $2 million, representing a year-over-year constant currency decrease of 19%.

The next few slides cover further detail of our revenue for each of our 3 segments. Slide 5 shows North America year-over-year revenue was $16.2 million. Revenues from our core products increased year-over-year due to increasing activity from our advertisers and partners. Revenues from our local products were up for the first time in the last several years due to better execution.

Turning to Slide 6. Europe revenue was $8.8 million. Revenue from our core products grew and the FX impact was positive, both of which were offset with lower revenue due to a temporary smaller sales team.

On Slide 7, Asia Pacific revenue was $2 million, which is lower than the prior year period due to recent management turnover and lost revenue from a large bankrupt customer in Japan.

Slide 8 provides a breakdown of our operating income. Our overall operating income was $1.1 million. North America generated profitability of $1.9 million, while Europe generated $800,000 of profit. This combined operating income of $2.7 million was largely offset by Asia Pacific's operating loss of $1.6 million.

Income taxes were $466,000, which includes the estimated impact of the new U.S. tax law changes and the resolution of an IRS audit. As a reminder, our income taxes reflect the taxes on North America and Europe income without any offsetting tax benefit from the separate tax jurisdiction Asia Pacific losses.

Going forward, our earnings in 2018 are expected to benefit from the new reduced U.S. federal tax rate. As our U.S. profit represents the largest portion of the company's taxable income, we are likely to see a significant positive impact on 2018 EPS.

Slide 9 shows the cost of revenue and operating margin. The cost of revenue as a percent of revenue increased over 0.5 point to approximately 12.8% due to our focus on member satisfaction as a tool for member retention. The operating margin decreased due to the continued investments in Asia.

Slide 10 presents our operating expenses by segment. North America expenses increased due to the investment in marketing and some selected headcount related costs. Europe expenses were flat, while Asia cost increased slightly due to selected product development and headcount related costs. Slide 11 shows that our productivity was up year-over-year with headcount relatively flat.

Moving on to Slide 12. DSO improved and operating cash flow was positive, which allowed us to exit the quarter with a solid cash position of $22.6 million, of which $16.4 million was held outside the U.S..

Turning to Slide 13. In summary, the financial performance improved in North America and Europe, particularly in our core travel products. However, we're still working with the management team in Asia Pacific to generate revenue growth. Even with the Asia investment, we maintained our overall profitability. Without APAC, our earnings in Europe and North America would have amounted to $0.17 a share in Q4 2017. In addition, we generated positive cash flow of $4 million and have maintained a solid cash position.

Looking forward, we expect the following. For our first quarter of 2018, we expect similar year-over-year changes in revenue as we have experienced over the last few quarters, with a focus on increasing our revenue from expanded offerings in our travel products and better performance in Asia Pacific. We are planning to maintain the increased member acquisition and member marketing spend. And we plan to maintain our investments in Asia Pacific. We expect an additional $400,000 of expenses during the quarter compared to Q4 for certain nonrecurring expenses.

In summary, given these trends and investments, we expect stable revenues year-over-year in Q1 and Q2, with an acceleration of growth towards the second half 2018. We still expect lower operating income year-over-year in the next quarter due to the investments in Asia Pacific. Holger will update you on various initiatives underway to drive purchases and bookings by our members in the next 6 to 9 months.

We continue to take steps to control noninvestment area costs and are focused on increasing our productivity. We believe that our focus on our global Travelzoo brand; our removal of unprofitable business activities; our focus on our members and the way we engage with them through our enhanced website and apps; our expanded offerings in the areas of hotels, vacations, local businesses; as well as our continued investments in our member acquisition will all collectively work to help position us for future growth in the global travel industry we operate in, which has positive long-term growth prospects.

So this concludes the financial summary of our fourth quarter of 2017. Now Holger will provide you an update on Travelzoo's business initiatives aimed to drive growth.

I'm pleased that our revenue trends improved across the board in Q4 in all regions. And I'm particularly happy that we can report today that our North America business, after 4 years of declines, has finally returned to overall growth, both in travel and in our local products.

We also had positive results in other markets, for example, in the U.K. and Australia, even though there remains a great deal of work to do across all of Asia Pacific. We also seek to improve profitability this year in addition to maintaining and then even strengthening revenue growth throughout 2018.

On Slide 15, I would like to talk about some of the business initiatives that are underway, which should help us maintain and improve growth towards the second half of 2018. First, we're expanding our offerings. Being a Travelzoo member is great, but we want to make Travelzoo membership even more attractive. So we are working to add exclusive benefits and member perks. We're also increasing the number of exclusive offers as we find them to drive sales and bookings. We are looking to accelerate the pace of growth of our hotel platform, so we are adding more exclusive rates and offers, which we have found to increase conversion rates. We also have started to break down the country silos in which our offers reside today. And our hotel platform for deals and special offers for our members is now fully globalized.

We've been working on several initiatives to broaden our offering in the area of packaged vacations with more exclusive offers for our members. We expect these, beginning with the second quarter, to provide a larger number of more relevant offers for our members. These partnerships are already underway, but we are also looking into investments into other companies or possibly acquisitions.

On the product side, we are making it simpler for our hotel partners to create deals for our members. We have developed personalized alert services, so we can inform those members who are particularly interested in a specific destination or type of vacation. And we have begun to implement a technology platform, which will create a more personalized product experience for our members and allow us to reach them beyond our traditional e-mail format, for example, on social media. We've already started to see benefits of this platform in the area of new member acquisition.

In marketing, we will create more visibility for the Travelzoo brand in 2018 and better and more actively communicate the benefits of Travelzoo membership to both existing as well as prospective members.

We plan to implement a number of partnerships in various countries throughout 2018 with the aim to acquire high-quality new members at lower costs. And we're also increasing our marketing staff across most of our markets. All these activities will not change financial performance immediately, but we believe we can maintain stable revenues at the beginning of the year and then accelerate revenue growth in the second half of the year. This should create a solid footing to grow earnings over the mid and longer term.

To summarize again, on Slide 16, as we maintain quality leadership, we are aiming to increase the number of exclusive offers for our members that are available on demand. And our goal is to accelerate top line growth, but in a smart way. Some investments are needed, but we would like to maintain profitability.

This concludes our prepared remarks. So we're now back to the operator.

(Operator Instructions) Our first question comes from Ed Woo of Ascendiant Capital.

I was wondering, was there any industry impact during the quarter, good and bad, from either weather or (inaudible) or anything? Or was it just a pretty staggered quarter? And what are you seeing in the overall travel industry?

I think there was really nothing specific that we can point out. I think in Europe, we're still dealing with the travel patterns I've talked about over the last few quarters that affected, particularly markets like Germany. Germany is probably the one where -- we had some challenges in Q4, because there was a bankruptcy of Air Berlin, the second largest airline. There were some other trends in Germany that just made it a bit difficult over there. But overall, the trends in North America, Asia Pacific and Europe are very similar to previous quarters.

We have the Olympics -- Winter Olympics coming up. Is it going to have any impact at all?

We haven't seen. I would say South Korea is not specifically a destination that we promote very strongly. It's very far away from North America and Europe where most of our members are. And our business is mostly deals, and you can imagine destinations that have big events are not destinations where you find a lot of deals. So it's probably something that impacts others travel companies more than us.

Okay. And then last question I have is, have you seen any impact from, I guess, hotel suppliers directly trying to sell directly to consumers? Has that had any impact on your hotel booking?

I think, again, this affects more the OTAs of the world, Expedia, Priceline, Booking.com. They are probably much more affected by that. We have actually not seen any impact on our business.

Our next question comes from Dan Kurnos of The Benchmark Company.

So let me ask Ed's question, same question a different way. We know that Priceline and Expedia have kind of turned the canons at each other right now in an effort to add inventory or supply at a pretty aggressive rate. I know that you're a little bit more focused on the vacation package side and there's probably a lot of opportunity being a smaller player there to get involved. But as you kind of talked about, Holger, trying to add more exclusive offers or deals, how much is the change in the marketplace and the way that people are trying to acquire inventory and the fact that guys seem to be bidding up to acquire that inventory or particular unique deals impacting your business model, number one? And number two, as you look to acquire more users, which is something that you've been talking about for quite some time now, how are you seeing -- understanding you have a different subset of users, how are you seeing ROI in the marketplace, particularly in pay channels, develop or evolve? Or are you leaning a little bit more heavily on social, as you mentioned, in order to try to push some of the more -- the cheaper channels?

Well, look, Dan, we're not an OTA. So we're not in the same shoes as Expedia or Priceline that aim to provide as much hotel inventory as they can. What makes our company different is the relationship that we have with our members. Our members continue to tell us that they love the brand, they trust us. Trust is actually very important. So what we are doing in the hotel area is not to aim to provide our members with the biggest variety and biggest amount of largest amount of hotels available, but actually recommend them places where they can expect to have a wonderful stay. So that makes us different. The hotels appreciate that. The hotels actually would like to stick their neck out of this sea of commoditization of hotel offers. And then on the marketing front, as I said, we are looking in 2018 to do more marketing partnerships. There are a lot of brands who have started to approach us to do co-promotions, co-marketing. I think that's going to be a great way to acquire new members in a more effective and better way than some of the online marketing that we've run over the last few years. So it's something we're going to try. We have seen some early good results from that. And I think that will help us to grow our -- this member base in 2018.

Just to be clear, Holger, on my first question, I just meant more -- I know you're not an OTA. I think that's very clear. My point to you, though, is it changing the way that -- is it making your life more difficult than acquiring some of the unique deals if some of these guys are maybe being lowered by other players in the space that are getting more aggressive and trying to pick up everything and anything they can and bidding up for, you're not seeing any of that in your -- in how you're trying to acquire deals or provide unique opportunities for your member base?

No, we haven't seen that. And if you listen to what I said over the last 2 quarters, I'm using more and more the word exclusive. We really positioned ourselves increasingly as a group of -- group and community of members who love to travel. Our members have excellent demographics. The hotel actually love our members. So we are actually separating ourselves from the crowd by telling the hotels that we can bring them a special group of members that is different from the mass market. So in that respect, no, we haven't seen that it becomes more difficult. If it becomes more difficult to generate special offers, it's more because of high occupancy rates in certain countries, in certain destinations. But that's always been a trend for Travelzoo over the last 20 years that when travel is very, very good, it's more difficult to source deals. But at some point of time, members and consumers start learning that it's become more expensive to travel to a certain destination. And then they are responding to the offers, again, the same way they did a few years before.

So that's a great segue -- and I appreciate the color. It's a great segue into the next question, which is effectively I know we've talked about in the past. We're never going to see probably a massive user acceleration, because I know that you guys would rather spend up to get a higher stickier user with a higher LTV. Could you just kind of share your thoughts on, on that balance, though, and sort of in the marketplace that you're seeing kind of what you think the addressable market is for members that seem to fit. I don't want to put words in your mind, but it looks like you've created sort of a profile for your member base. And there is a certain subset in the travel sector that fits nice in -- within your membership base that you can -- that helps you pitch to these hotels. So can you talk about how much room or headway you think you have versus your current membership base and where you could get to from a member acquisition perspective with relation to sort of that higher sticky user that fits that profile?

Our members are most interested in value. We are about deals. But in the end, what we have found is that our members in the NPS, they want a good price, but they are also equally -- they want a really great experience. And I think value-seeking consumers is a very large group out there among consumers. So I think our addressable market is rather big. What probably limited us more in the past is that in order to take advantage of the deals that we have been promoting in products like Top 20 you have to be very flexible on when you can travel. So we tend to have members that are a bit older, that maybe are retired. We have members that are flexible, that can travel, for example, during the middle of the week. But over the last couple of weeks and now with this new effort in vacations, what we are looking to do is provide our members to keep the option to say, "Okay, well, the best deal is on this and this date. But you can also travel on another date. The price might be a little bit higher, but it's still a great value." So we believe that more members can take advantage of these kind of offers. We haven't done that in the past, because the technology was -- the technology is obviously improving, and I think that will help us have wider appeal.

And on the tech front, you obviously invested a lot of money in the tech stack. I think frankly, you are the one who spearheaded this when you came back as CEO and have really turned the company around in an efficient fashion from a tech perspective. You talked again about enhancing the mobile experience. I'm just curious sort of relative to -- I know this is always an evolving process. But relative to where you'd like to be from a tech perspective, how comfortable are you with the desktop experience, how much more do you need to do on mobile, understanding that's where the majority of your traffic continues to come from and is the primary growing funnel. So I'm just curious where you're at from that perspective and how much more you think you need to investigate to get to where you'd like to be?

Look, I think we're not looking to increase our investments in product and technology. Of course, we like to improve our products. But what we're looking to do is do it a bit smarter and not do everything ourselves. The company had a history of doing a lot of things, programming, development, coding. We did everything ourselves. And increasingly, we are shifting over to towards solutions that are provided by third parties. But the world has actually changed. I mean now this year, becoming 20 years. So when we started off in the first 10 years, there wasn't a lot of technology out there that we could leverage. Now we have fantastic solutions, technology solutions that are in the cloud and we're leveraging this more and more and more. So over time, I actually believe that our expenses and investments into product and product development and technology will come down, while we're actually improving our products more than we have in the past. So that's the direction I want to march towards.

Great, that's helpful. And just last one from me just on Asia. I know it continues to be a little bit of a headache as you go through the transition period. A little bit of unfortunate luck with the customer you called out in Japan, which you knew about. So I just -- how was that trending, I guess, would be the right way to ask it. Have you filled a few more positions since last time? How do you feel about the head that you've hired? How have they performed? Just give us kind of an update there.

Yes, some markets are actually proving you don't see it, because we report overall Asia Pacific as a segment. But in some countries, it's actually started to do quite well. We've seen revenue increases that are double digits. So far, Q1 is looking that better than Q4 when I look at the year-over-year trends. So I think we can do it. China is probably the country we're still looking to establish the right management and the right structure, but I'm confident we will solve it. On the other hand, markets like Australia, Hong Kong where we put new GMs into place, they are doing -- they are starting to do quite well. So it really seems related a lot to management staffing in Asia Pacific, not so much that we are pursuing a strategy that doesn't work.

Okay. I'll turn back now to Mr. Holger Bartel.

Sure. Ladies and gentlemen, thank you again for your time and support. We, of course, look forward to speaking with you again next quarter. Have a great day.

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