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Edited Transcript of TZOO earnings conference call or presentation 24-Oct-18 3:00pm GMT

Q3 2018 Travelzoo Earnings Call

NEW YORK Oct 25, 2018 (Thomson StreetEvents) -- Edited Transcript of Travelzoo earnings conference call or presentation Wednesday, October 24, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Glen Ceremony

Travelzoo - CFO & Corporate Secretary

* Holger Bartel

Travelzoo - Global CEO

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Conference Call Participants

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* Moon Woo

Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media

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Presentation

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Operator [1]

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Hello, everyone, and welcome to the Travelzoo Third 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 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 refer to the company's website for important information, including the company's earnings press release issued earlier this morning. An archived recording of this conference call will be made available on the Travelzoo Investor Relations website at www.travelzoo.com/IR.

Travelzoo's Chief Financial Officer, Glen Ceremony, will start with an overview analysis of the third quarter financial results.

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Glen Ceremony, Travelzoo - CFO & Corporate Secretary [2]

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Thank you, Jonathan, and welcome to those of you joining us today. For the format of today's call, I will review our third 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.

Please open our management presentation to follow along with our prepared remarks. Our presentation is available on our Investor Relations website.

To begin, let's turn to Slide 3, which provides our key financial highlights for the quarter. Our revenue for the quarter grew to $25.3 million, up 2% year-over-year in nominal terms and 3% in constant currencies. Our diluted earnings per share for the quarter was $0.01, a year-over-year increase of $0.06.

Our global number of members increased to 29.8 million and our social media followers and mobile app downloads continue to grow.

Slide 4 details our revenue by segment. Revenue in North America was relatively stable year-over-year at $14.9 million. Revenue in Europe was $8.4 million, representing a year-over-year increase of 6%, which is the second consecutive quarter of year-over-year growth for Europe in over 2 years. Revenue in Asia Pacific was $2 million, representing a year-over-year increase of 13% or up 15% in constant currencies.

Slide 5 highlights the company's financial performance in our core businesses in North America and Europe. Revenues, operating income and EPS are growing and operating margins are at 13%. This often gets overshadowed by our investments in Asia Pacific, resulting in a much smaller profits and margins for the company overall. Furthermore, losses in Asia Pacific cannot be used to offset our tax bills in our core markets. We are looking to take Asia Pacific to profitability in the next 2 years. The next few slides cover further detail of our revenue for each of our 3 segments.

Slide 6 shows North America revenue of $14.9 million. Revenues from our core products increased year-over-year due to increasing activity by our members, advertisers and partners. Yet, our growth in North America was affected by the large loss of the advertising customer, which was taken over by regulators during the quarter. This took several percentage points off of our growth and increased bad debt provision, also lowered income and EPS.

Turning to Slide 7. Europe revenue was $8.4 million. Revenue from our core products grew and local revenue was up by 11%.

On Slide 8, Asia Pacific revenue was $2 million, which is the third consecutive quarter of year-over-year growth, driven by improvements in several markets.

Slide 9 provides a breakdown of our operating income. North America generated profits of $1.4 million and Europe generated profit of $900,000. This combined operating income of $2.3 million was offset by Asia Pacific's operating loss of $1.6 million for total segment operating profit of $700,000.

Income taxes were $500,000, which represents tax on North America and Europe profitability, with no tax benefit from the Asia losses given that these are in separate tax jurisdictions. Operating income improved year-over-year by $700,000, resulting in $100,000 of net income.

Slide 10 shows the cost of revenue and operating margin. Cost of revenue as a percent of revenue was slightly down to approximately 11.8%. The operating margin increased year-over-year as a result of the increased revenue this quarter.

Slide 11 presents our operating expenses by segment. Operating expenses as a percent of revenue decreased for Europe and Asia and were flat for North America.

Slide 12 shows our productivity improved year-over-year.

Moving on to Slide 13. We continue to use our solid cash position for stock repurchases.

Turning to Slide 14. In summary, the financial performance, driven by our core travel products, continues to improve and generate increased profits to help further investment in our products and marketing. Our overall revenue growth continued with travel revenue increasing in all regions. We continued to generate operating profit despite our continued investments in Asia and our products, and we have maintained our solid cash position enabling us to continue our stock repurchases.

Looking forward, we expect the following. For the fourth quarter of 2018, we expect positive year-over-year changes in revenue as we have experienced over the last several 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 increase our marketing spend as well as maintain our investments in Asia Pacific. In addition, we plan to pick up our portion of the expected losses from our equity investment.

So in summary, given these trends and investments, we expect year-over-year growth in earnings to continue into our fourth quarter of 2018. We aim to maintain positive operating income, while 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 going into next 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.

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Holger Bartel, Travelzoo - Global CEO [3]

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Hi, everyone. We're pleased with the progress that we are making in our goal to build Travelzoo into much larger, global and highly profitable travel membership organization and community.

Revenue growth has resumed, even accelerated in many markets 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 at a faster pace in 2019.

On Slide 15, I would just like to highlight 2 initiatives that are underway, which we believe will increase member activity and revenue growth. We have launched the global technology that offers our members who live around the world the ability to book the hundreds of exclusive hotel deals that we negotiate every month also as complete trips. We have found that when, for example, a member in London receives a special offer for a hotel in Rome, she or he are several times more likely to book a trip if the offer is not just only a hotel 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 into a package offering. We launched this technology in Germany towards the end of Q3, and we've seen their members book up to 5x more trips than if we just tell them about a hotel-only offer. We are now rolling out this technology in select markets in Europe this quarter and in North America at the beginning of next year.

We are not looking to become a tour operator ourselves. Instead, we are working in various markets with established and experienced partners in the travel industry. We are merely leveraging these partnerships and the global technology to create a better offering for our members in a more simple and convenient way to make -- to take advantage of a fantastic deal.

On the marketing side, we have started to beef up our marketing teams around the world. And 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 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 out our reach.

Lastly, I'd like to say a few words about our business in Asia Pacific. We understand that the continued losses are not acceptable neither for investors nor for us. More efforts are needed from our global organization to assist Asia Pacific with growing revenue to reach profitability. So we have launched a project called Internally Asia Pacific 2020. There will be an experienced executive to lead the project, who will be joined by 3 staff from Travelzoo's key functions in Europe and North America who know the Travelzoo business well. The project team will outline a clear path to profitability and manage execution. It will also look into various partnerships opportunities, particularly in China, that will allow us to grow scale more rapidly in this large opportunity market.

To summarize, 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 our goal continues to be to double revenues of the company in the next few years. As I said earlier, we aim to take Asia Pacific to positive operating margins in the next 2 years and while this will require some investments, as we have done in the past, we will do this in a smart way, while maintaining and even increasing profit margins.

Before we move onto the Q&A, I'd like to make an announcement in change in our senior management team. After many years with Travelzoo, our CFO, Glen Ceremony, is taking on a new challenge at an exciting company in a very different industry. His last day will be October 26. We all would like to thank Glen for his contributions to the business. The company has retained Wayne Lee as Interim Chief Financial Officer starting October 26, while the search for new CFO is performed. Mr. Lee was Travelzoo's former CFO serving from 2006 to 2011.

In addition, on October 26, Ms. Lisa Su, the company's Vice President and Controller, will become the company's Principal Accounting Officer. Ms. Su has served as the company's Vice President and Controller since May 2011.

Now back to the operator.

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Questions and Answers

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Operator [1]

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

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Moon Woo, Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media [2]

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I was just wondering what's your overall sense of how the travel industry is doing now. And I assume that we had a pretty positive summer travel season. What's your outlook heading into the end of the year and maybe into next year?

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Holger Bartel, Travelzoo - Global CEO [3]

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Yes, you're right, the season was actually quite good. Travel is increasing. What we are seeing, and I think probably others in the industry as well, is that the more popular global destinations are becoming increasingly busy. So places like London, Rome, New York, more and more tourists are going there. And at some point of time -- at some times during the year, it's even difficult to get hotels, but at the same time, we see seasonality increasing. So if we look at New York, there is a lot of empty rooms to fill in January and February. But the other trend is that people are looking to travel more and more to destinations that they are not familiar with. And I think that's actually good news for us because that's the type of member that we have. Our members have been to a lot of the most popular places. They're adventurous. They would like to go to places like Iceland or the Azores, destinations that others haven't been to. So I think that's a great trend that works towards us inspiring our members to go to places that they haven't thought about before.

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Moon Woo, Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media [4]

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Great. And what's your outlook heading into next year? Do you think there is any concerns with macro issues? Or you think it should be another good year next year?

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Holger Bartel, Travelzoo - Global CEO [5]

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Based on what we are seeing today, I would say next year, the trend will continue. Travel will continue to grow. But as we all know, in the past, often things -- sometimes things happen that change travel behaviors. So it's very difficult to predict. But if everything remains like it is today, we see travel continuing to grow next year.

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Moon Woo, Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media [6]

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And Glen, wish you good luck in your new opportunity.

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Glen Ceremony, Travelzoo - CFO & Corporate Secretary [7]

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Thanks, Ed. I appreciate it.

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Operator [8]

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

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Holger Bartel, Travelzoo - Global CEO [9]

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Thank you, again, for dialing into today's conference call. We look forward to speaking with you next time. Bye.

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Operator [10]

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