Travelzoo (TZOO) 2018 Q1 法說會逐字稿

Hello, everyone. Welcome to the Travelzoo First Quarter 2018 Financial Results Conference Call. (Operator Instructions) Today's call is being recorded.

The company would like to remind you that all statements made during this conference call and presented in the 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 the law, the company undertakes no obligations to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the company's website for important information including the company's earnings press release issued earlier this morning. An archived recording of the conference call will be made available on the Travelzoo Investor Relations website at www.travelzoo.com/IR.

Travelzoo's CFO, Glen Ceremony, will start an overview analysis of quarter 1 financial results.

Thank you. Please open our management presentation, which is available on our Investor Relations website, to follow along with our prepared remarks.

To begin, let's turn to Slide 3, which provides the key financial highlights for the quarter. Our revenue for the quarter grew to $30.9 million, up 9% year-over-year in nominal terms, and up 4% in constant currencies.

Our diluted earnings per share from continuing operations for the quarter was $0.20, that's up $0.14 (sic) [$0.13] year-over-year driven by the growth in revenue and despite our continued investments in Asia-Pacific.

Our members remain stable at 29.7 million, and our social media followers and mobile app downloads continue to increase.

Slide 4 illustrates our significant improvement over the last 12 months. Revenue has now grown year-over-year, which is driving profitability North America and Europe. In Asia-Pacific, we continue to invest and build scale.

Slide 5 highlights our revenue by segment. Revenue in North America was $18.6 million, representing a year-over-year increase of 6% in nominal terms and on a constant currency basis. Revenue in Europe was $10.3 million, representing a year-over-year increase of 13%, or flat on a constant currency basis. And revenue in Asia-Pacific was $2 million, representing a year-over-year increase of 12% or up 4% on a constant currency basis.

The next few slides cover further detail of our revenue for each of our 3 segments. Slide 6 shows North America year-over-year revenue of $18.6 million. Revenues from our core products increased year-over-year due to increasing activity of our members, advertisers and partners.

Turning to Slide 7. Europe revenue was $10.3 million. Revenue from our core products grew, the FX impact was positive and local revenue was flat.

On Slide 8, Asia-Pacific revenue was $2 million, which is higher than the prior year period due to improvements in China, Hong Kong and Australia as well as the positive FX impact.

Slide 9 provides the breakdown of our operating income. North America generated profitability of $3.2 million (sic) [$3.3 million], while Europe generated profit of $2 million. This combined operating income of $5.3 million was offset by Asia-Pacific's operating loss of $1.7 million, for a total segment operating profit of $3.6 million. Income taxes were $1.3 million. And as a reminder, our income taxes reflect taxes on North America and Europe income without any offsetting tax benefit from our separate Asia-Pacific losses. However, our effective tax rate is decreasing as we are benefiting from the corporate tax cuts in the U.S.

Slide 10 shows the cost of revenue and operating margin. The cost of revenue as a percent of revenue decreased 1.8 percentage points to approximately 11% due to our focus on efficiently servicing our members and lower voucher revenue. The operating margin increased driven by the strength in our core travel revenue.

Slide 11 presents our operating expenses by segment. North America and Europe operating expenses as a percent of revenues were slightly down, and Asia's operating expenses were slightly up due to our continued investment in Asia's product and marketing.

Slide 12 shows that our productivity was up year-over-year and quarter-over-quarter, with headcount down.

Moving to Slide 13. DSL improved and operating cash flow was positive, which allowed us to exit the quarter with a solid cash position of $22.4 million.

Turning to Slide 14. In summary, our financial performance, including revenue and operating profit, was significantly improved in the last 12 months, particularly driven by our core travel products. Asia-Pacific generated revenue growth and is still in investment mode. We continue to generate positive operating cash flow and have maintained a solid cash position.

Looking forward, we expect the following. For our second quarter of 2018, we expect positive year-over-year changes in revenue as we have experienced over the last several quarters, with the focus on increasing our revenue from expanded offerings in our travel products and better performance in Asia-Pacific. We are planning to maintain an increased member acquisition and member marketing spend as well as maintain our investments in Asia-Pacific. We expect an additional $500,000 of non-recurring expenses during the quarter compared to Q1 for selective business initiatives.

In summary, given these trends and investments, we expect year-over-year growth to continue in our second quarter of 2018. We expect operating income year-over-year. However, we will selectively reinvest in our business in areas such as Asia-Pacific as well as our products and audience to support future growth.

Holger will update you on the various initiatives underway that we expect to further drive purchases and bookings by our members starting in the second half of the year. We will also continue to take steps to control noninvestment area cost to continuously increase our productivity.

Now Holger will provide you an update on Travelzoo's business initiatives.

Hello, everyone. As our results from the first quarter show, we are pleased with the progress we are making in our goal to build Travelzoo into a much larger global and highly profitable travel membership organization and community.

Revenue growth has resumed or accelerated in almost all markets that we are operating in. And our focused investments in product and technology start paying off. With solid operating margins in North America and Europe, we will continue to invest into our franchise in China and other countries in Asia-Pacific, and we're looking to grow revenues even faster in the second half of 2018 and the years beyond.

On Slide 15, I'd just like to highlight 2 initiatives that are on the way, which we believe will grow member activity and revenue. Over the past 9 months, we have been working on technology to offer our members who live around the world the ability to book the hundreds of exclusive hotel deals that we negotiate every month also as package offers. We have found that when, for example, our member in Berlin receives a special offer for a hotel in Rome, they are several times more likely to book if the offer is not just the hotel-only rate, but a package that includes hotels, airfare and local activities.

We have also found that hotels and airlines are willing to give us better rates if we bundle them in package offerings. We are planning to roll this technology out in select markets in Europe towards the end of Q2. And I'd like to note that we are not looking to become a tour operator ourselves, but we are working instead in various markets with established and experienced partners in the local travel industry.

We are nearly leveraging these partnerships and global technology to create a better offering for our members. On the marketing side, we have started to beef up our marketing teams around the world. Our research shows that we still have a large opportunity to grow Travelzoo beyond our current member base. As many consumers either do not know about us or don't know exactly what we do. Many of our existing members are highly loyal, but we need to further build visibility and scale. We are finding that partnerships with strong brands are an effective and cost-efficient way to reach new audiences and build our franchise.

So to summaries, 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. We want to accelerate top line growth and at least double the size of the company in the next few years. This will require some investments, but as we have done in the past, we will do it in a smart way, while maintaining or even increasing profit margins. Now back to the operator.

(Operator Instructions) Our first question will come from the line of Dan Kurnos from Benchmark.

I got just a few things, Holger, high-level here. Look, I mean, Asia grew. I know there's been some discussion. Obviously, we're still a loss there. Are you seeing some traction in some areas. I know you've kind of revamped the internal heads, the internal heads of the businesses there. So can you just give me your thoughts on, now that you've, at least for a quarter, gotten this thing to growth, what the long-term trajectory is? Are you still looking for partnerships? Are you -- how do you get that to profitability? And just generally, sort of your outlook for that business segment.

Yes, we're happy that revenues are growing again in Asia-Pacific. We have increased marketing and product development in these markets in this quarter, which you clearly see by the loss that is still generating these investments. The most important markets in Asia are, of course, China, Greater China for us and, yes, this is a market where we are looking to work with partners. We feel we have just started to begin build the Travelzoo brand in China, and it's not going to be a market where we can just do it ourselves. So it will be a market where we're looking with partners. In the other countries we are operating in, we have brought really strong and great general managers in place. We are seeing more than double-digit growth in several of these markets. And as we continue to build scale, we believe we can bring them to profitability, yes, in the next couple of years.

Got it, that's helpful. And then on Europe, couple of things. So nice uptick in subs. I know that you called out kind of 2 drivers in your prepared remarks, although the shifts towards more packaged products at the end of Q2 sounds like that's more of a longer-term tailwind than near-term. So is there anything else to kind of call out? Beginning of the year can always be a little bit volatile from the sub perspective, but it was a nice uptick there, even sequentially a little bit more, I think, than you were seeing previous. Is there anything to call out there?

Well, the travel industry is strong and continues to be strong, and hotels are becoming busier than ever. And in Europe, travel has been picking up quite a bit. But as we see, this is still an environment in which we can continue to grow our sales as -- whether they are hotels or airlines, or the suppliers always have certain periods and needs when they are looking to sell more of their products. And as more people are traveling and as we are increasing our offerings that are available to our members when they need them, where they want to go, we are benefiting from the strong growth. And the travel industry is certainly an industry that is likely to continue to grow for many years and decades to come because more and more people will just be traveling all over the world.

On that front, just in terms of hotels as you brought it up, I don't know that you explicitly talked too much about the booking platform. I know it's kind of part and parcel of the new strategy, but can you just give us an update on how rollout is pacing, how many customers are touching with it now? I doubt you'll give a percentage of revenue, how fast it's growing. Just any granularity around the new product will be helpful.

Look, the hotel platform is an essential part, not only for hotel bookings, but also for the package offerings. So in that respect, it was one of the pieces that we needed in order to really build the product that we ultimately want to offer to our members. Members join us because they want to receive exclusive, highly attractive offers to take trips around the world to destinations they haven't been to. And I feel, towards the end of this year we're able to offer this to our members. And the hotel platform is an important part and an integral part of this strategy.

And then, just finishing up here. I mean, you talked about sort of accelerating growth in the back half of the year, and then longer term, doubling the size of the company. Just my final questions would effectively be, first of all, I assume that will be FX-neutral because I don't know what your guys' assumptions are for currency. Obviously, Europe was aided by currency in Q1. So I'm going to assume that's FX neutral. And so you're seeing a path to accelerating FX-neutral growth in 2018, is that a fair statement? And then sort of doubling the size of the company, are you -- do you think you would be able to do that organically, or you're going to have to -- do you think that if things improve, you'll take the opportunity to either sign partnerships or make some acquisitions in order to get to your goal?

Yes, correct. Dan, we are looking to accelerate growth on a nominal -- sorry, on a constant currency basis, correct. Right now FX is actually a tailwind for us because most of our expenses are in U.S. dollars, but revenues come from currencies all across the world. And second, yes, we have a lot of opportunity to double or even triple the size of the company. It's something that we are looking to do. I have a vision for this company to be, as I said, a very large, global, highly profitable travel membership organization. We can build scale, we can build visibility, we are expanding our products. I cannot comment, of course, on all the strategic initiatives that we have. But yes, we are very keen on making Travelzoo a much, much bigger company in the future.

And our next question comes from the line of Ed Woo from Ascendiant Capital.

My question is more on the industry. I know you mentioned that Europe seems to be stronger. How do you feel had you entered into the summer travel season this year versus the past couple of years in terms of what you think outlook is around the world?

Ed, this year is a little bit stronger even than last year. But in general, the trends are still the same, that we have seen in the last few years. For example, in Europe, we still see a high concentration of demand in countries that are regarded as relatively safe. Hotel rates are increasing in places like Spain, Portugal, but it shows we can still thrive in this environment. And just generally, in North America, the economy in the U.S. and Canada are very good, people are traveling more. And last but not the least, China, the more you travel around, the more Chinese travelers you see. It's still -- although China is now the largest outbound travel market. This will just continue to grow in the next few years. And Chinese travelers, as you've seen by some of the press releases that we did, are now interested in exploring destinations that are just beyond the typical places like Paris or Rome or New York. They are looking to venture into destinations that are not that well known. And this is a great opportunity for us because we are sourcing offers and trips in these destinations and can introduce members, for example, a country like China, into destinations that they're not so familiar with.

You're talking about the economies of the travel experience. Sometimes, that could be a mixed bag. Are you seeing some pushback from some of your travel suppliers to, say, hey, we don't need to advertise as much because the business is already so strong. Or what do you see as the competitive outlook right now, especially with either alternative accommodations or with direct suppliers that are trying to bring more stuff in-house?

Look, what our travel suppliers are providing are often very unique products and trips that are a little bit more different than just the very standard. Okay, here's a flight in air to Maui. What we have learned is our members are really appreciating experiences more than just simple deals. So for example, they want to travel to Italy to participate in a cooking class. They want to go to Hawaii to learn how to surf. So -- or they want to go to Europe on a river cruise instead of just traveling to one destination. So the product and the trips that our members are most interested in are not so standard, and I think this is something that we continue to see that our suppliers, our travel partners want to offer and promote, actually, even more so than in the last few years because as I just mentioned, not only with regards to destinations, but with regards to trips themselves, travelers are becoming much more sophisticated. It's not anymore only about just going to a place at the cheapest price. It's about what you actually do there when you get there.

And any impact on alternative accommodations like Airbnb?

No, we haven't seen that. I think Airbnb and similar companies are providing additional places where tourists can stay. I mean, if you think about, a place like Paris, hotels alone can probably not accommodate in the future anymore all the tourists that are coming. So I think that's just adding supply to the industry. But it's probably more companies like Expedia or Booking.com that are affected by these changes, not so much us.

Now I'll turn it back to Mr. Holger Bartel.

Well, thanks ladies and gentlemen. Thanks again for your time and support, and we'll speak with you again next quarter. Thanks. Bye.

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