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Edited Transcript of TZOO earnings conference call or presentation 27-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Travelzoo Inc Earnings Call

NEW YORK May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Travelzoo Inc earnings conference call or presentation Thursday, April 27, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Glen Ceremony

Travelzoo Inc. - CFO and Corporate Secretary

* Holger Bartel

Travelzoo Inc. - Chairman and Global CEO

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Conference Call Participants

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* Daniel Louis Kurnos

The Benchmark Company, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to the Travelzoo First 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 safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ 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 Chairman and Global CEO. Sir, you may begin.

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Holger Bartel, Travelzoo Inc. - Chairman and Global CEO [2]

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Thank you, operator. Good morning, and thank you for joining us today for Travelzoo's First Quarter 2017 Financial Results Conference Call. I'm Holger Bartel, and joining me today is Glen Ceremony, the company's Chief Financial Officer. Glen will walk you through today's format.

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Glen Ceremony, Travelzoo Inc. - CFO and Corporate Secretary [3]

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Thank you, Holger and everyone, for joining us today. For the format of today's call, I will review our first 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 at www.travelzoo.com/earnings to follow along with our prepared remarks.

Before we begin, we want to highlight that as previously announced, we discontinued our SuperSearch product during the quarter and sold the Fly.com domain name in order to support our strategic decision to focus exclusively on our global Travelzoo brand. As a result of these discontinued operations, the current and prior period financial results that we are presenting today have been adjusted to remove revenue and expense of these products from the continuing operations income statement line items. They are presented as one net line item in our income statement referred to as discontinued operations.

Now let's turn to Slide 3, which provides the key financial highlights for the quarter. Our revenue for the quarter, which excludes Search, was $28.4 million, down 8% year-over-year or down 5% in constant currencies. Our diluted earnings per share from continuing operations this quarter was $0.07. A higher effective tax rate, driven by the geographic mix of income and losses in Asia Pacific, led to lower net earnings.

Our total diluted earnings per share, including income from continued and discontinued operations, was $0.21, which is $0.07 higher than the prior year period due to the inclusion of the gain from the sale of the Fly.com domain name in the current period income from discontinued operations.

Our members grew to 29.1 million, and our social media followers and mobile app downloads continued to increase.

Slide 4 highlights our revenue by segment. Revenue in North America was $17.5 million, representing a year-over-year decrease of 3%. Revenue in Europe was $9.1 million, representing a year-over-year constant-currency decrease of 5%. And Asia Pacific revenue was $1.8 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 where we saw an increase of $200,000 in revenue from or travel products, which was offset by lower revenues from the sale of voucher deals from local businesses.

Turning to Slide 6. There was a $930,000 negative FX impact on Europe revenue. On a constant currency basis, Europe revenue was $10 million, with a slight decrease in revenue from travel products and lower voucher sales. While we saw good growth in our German business, tourists from the U.K. and other countries continue to avoid certain destinations, such as Egypt or Turkey, due to security concerns.

On Slide 7, Asia Pacific revenues disappointed this quarter as a result of several factors, which we are addressing. Higher staff turnover and unfilled sales positions affected revenues. In addition, we further lost revenue in Japan due to a bankruptcy of a large travel agent.

Slide 8 provides a breakdown of our operating income. We had $2.1 million in overall operating income. North America generated $2.7 million, and Europe generated $900,000 of operating income. Asia Pacific recorded an operating loss of $1.5 million.

Income from discontinued operations was $1.8 million, which includes the onetime gain from the sale of Fly.com domain name and a loss on discontinued operations, both net of tax. Total net income, including both income from continued and discontinued operations, was $2.7 million.

Slide 9 shows the cost of revenue and operating margin. The cost of revenue as a percent of revenue continues to decrease year-over-year due to our lower syndication revenue and voucher sales.

Slide 10 demonstrates our progress on managing costs. Operating expenses were lower year-over-year in North America and Europe. Relative to revenues, we increased our investments in marketing in Europe and Asia Pacific.

Slide 11 shows that our productivity was stable year-over-year.

Moving on to Slide 12. DSO remained flat. In addition, we generated operating cash flow of $555,000. Proceeds from the sale of the Fly.com domain name were partially offset by $2 million of stock repurchases. We exited the quarter with a solid increased cash position of $28.6 million, of which $10.8 million was held outside the U.S.

Turning to Slide 13. In summary, the financial performance continues to improve in North America. However, Asia Pacific had a difficult and unusually weak quarter. We have demonstrated improvements in operating costs from our continued focus on operating smarter. And we have maintained a solid cash position despite continued stock repurchases.

Now looking forward, we expect the following. For the second quarter, we expect similar year-over-year changes in revenue as we have experienced over the last several quarters. However, we are targeting to return to revenue growth by the fourth quarter of 2017 or first quarter of 2018, mainly driven by an increase in revenue from expanded offerings in our travel products.

We expect the continued negative FX impacts on our European revenue, and we are planning to increase member acquisition and member marketing spend sequentially. We plan to increase investments in Asia Pacific, in particular in China, which will reduce year-over-year EPS by approximately $0.03. We expect an additional approximate $500,000 of expenses in Q2 for certain nonrecurring expenses during the quarter.

In summary, given these trends and investments, we expect our second quarter to generate lower revenues and operating income year-over-year. Holger will outline the various initiatives underway to drive purchases and bookings by our members in the second half of the year. We continue to take steps to control non-investment area costs and are focused on increasing the productivity of our resources.

We believe the steps we are taking, including our focus of all resources 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 upgraded website and apps; our expanded offerings in the areas of hotels, vacations and local businesses; as well as our continued investment in our member acquisition, all of which will collectively work to help position us for future growth in the global travel industry we operate in, which has positive long-term growth prospects.

This concludes the financial summary of our first quarter of 2017. Now Holger will provide you an update on Travelzoo's business initiatives aimed at driving growth.

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Holger Bartel, Travelzoo Inc. - Chairman and Global CEO [4]

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Well, let me start off by saying that I'm disappointed with the results from the first quarter. Yes, positive trends continued in North America, but we have not yet reached the year-over-year growth in revenues that we would like to achieve.

So instead of talking about our strategy, I thought it would be more insightful to share today some of the business initiatives that are underway, which we believe will return us to growth mode in the next 9 to 12 months. These are shown on Slide 15.

First, now that we can put 100% of our resources against our global Travelzoo brand, we are 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 also know that our members love exclusive offers. They drive sales and bookings.

The bookings on our hotel platform and search are growing but still not at the pace that I would like to see. So we're adding more exclusive rates and offers, which we have found to dramatically increase conversion rates.

We've also started to break down the country silos in which our offers reside today. And we are globalizing our hotel platform so that any member worldwide has access to any offer that we have negotiated from one of our 25 offices around the world.

We are also broadening our offering in the area of packaged vacations with more exclusive offers for our members. We do this in partnerships, but we're also looking into investments into other companies or even acquisitions.

On the product side, the global rollout of our hotel platform will make it easier to find hotel offers and book them anywhere in the world. We are also making it simpler for our hotel partners to create deals. We have developed personalized alert services so that we can inform those members who are particularly interested in a specific offer. These alerts are currently being tested and will roll out in the next few months.

Finally, we're also overhauling our app to make it more personalized. We do this with a strong focus on China where we see mobile usage and adoption to run ahead of other countries.

In marketing, we need to better and more actively communicate the benefits of Travelzoo to existing as well as prospective members. We believe that we can articulate the value of the Travelzoo brand to consumers even more strongly. We have also begun to work on a loyalty program with the goal of motivating our members to shift their usage to Travelzoo and use us more frequently.

Of course, all these activities will not change financial performance overnight, but I believe we can return the company to overall revenue growth over the next 9 to 12 months in order to create a solid footing to grow earnings over the mid- and long term.

To summarize, as seen on Slide 16, as we maintain quality leadership, we have begun to significantly increase the number of exclusive offers for our members. We are looking to resume top line growth but in a smart way. Of course, some investments are needed, but we would like to maintain profitability.

This concludes our prepared remarks. 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 Dan Kurnos of Benchmark Company.

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Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - Analyst [2]

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Holger, thanks for some color on some of the initiatives. I think it's helpful to people thinking -- as they think about the story. I guess my first question, high level for you just on that front is, obviously, there was a bit of a transition last year as we got away from Getaways more into the hotel booking platform. It still sounds like you're making a lot of investments near term. So I don't know if I want to characterize it as an investment year this year, but I mean, would you view it that way? I mean, you still have to kind of keep research and product development expenses high over the next few quarters until we get into Q4. Just kind of the -- how do you -- how should we think about the timing of how long expenses will remain elevated as you work through some of the product overhaul and new product feature rollouts?

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Holger Bartel, Travelzoo Inc. - Chairman and Global CEO [3]

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Yes. First of all, we believe we need to move more transactions over to us. One of the main reasons for that is if we send our members to buy with advertisers, we have no idea what they are doing. We don't know what they buy. We don't know if they buy. We don't know if they buy a vacation in Hawaii or an airfare to Sydney. But of course, it's important that over time, we personalize the content that we show our members. So in order to do that, we need to know more about them. And if we own or at least know what the transaction is, we will better know what our members like, and we can personalize more. And I think that's really critical for our success in the future. Related to that, over the last few years, we invested a lot into our hotel platform. You heard that now we want to also expand our offering in the areas of vacations. I think when a member comes to our website and says, "I want to do a trip to Rome," and we don't really have a deal, we should at least have some offers that we can show them. But this time, we are not planning to make investments ourselves. We would rather like to do it with partnerships. We might do it with investments in other companies plus the acquisitions, as I said. But we don't want to invest ourselves in this new technology.

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Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - Analyst [4]

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So let me ask you then, kind of following up on that line of thinking. Obviously, Top 20 and advertisers have been sort of the staple here. If you're trying to get a little bit more high touch does that -- is that going to compete, cannibalize? How should we think about sort of the shift and the timing of the shift away from maybe a more traditional ad-based model? Or is that still going to be kind of a staple component, and it's about bringing them -- starting there and then bringing them back into the funnel in other ways? Members, that is.

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Holger Bartel, Travelzoo Inc. - Chairman and Global CEO [5]

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I really believe we can do both. And working together with our advertisers is a joint road to success. I mean, if I just think of Amazon, Amazon, on the one hand, sells a lot of products themselves. On other products, they fulfill it. They don't really run the shop. So you know it's -- there are a lot of companies out there that are extremely specialized, and they are very knowledgeable of what they are doing. We work with a fantastic company in America, for example, that has escorted tours all over the world. The feedback we receive from our members on these tours is excellent. I don't believe we would get into the business of hiring people who escort people around destinations that they travel to. So this is a good example of someone we will continue to work with very successfully. On the other hand, a lot of the destinations that, for example, Americans would like to fly to Florida or Las Vegas, we don't really have a lot of partners that create offers in that area, but we have strong relationships with hotels in these areas, so I think we can augment the offering. So in short, I think we can really do both and make both sides happy.

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Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - Analyst [6]

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Got it, that's helpful. And then now that you've kind of framed the conversation, obviously, sub growth has been a bit muted. I know that you've talked historically about focusing on higher-value subs. So it's not about the quantity; it's more about the quality of subscribers. But do you think that you might get aggressive in -- more aggressive in that channel once you get these new features rolled out? Are you already planning on that now? Just how should we think about the balance of pursuing increased subscribers versus how long it's going to take you to roll out some of these new features to have a more comprehensive offering that you think will be stickier for users?

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Holger Bartel, Travelzoo Inc. - Chairman and Global CEO [7]

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Well, first of all, don't forget that we are unsubscribing members regularly from our list. For example, e-mail addresses that don't work anymore, people that don't click for a long period of time. We always look at what our members are doing. And so we are still adding a lot of members. I think this quarter, again, we added almost 1 million members, but you don't necessarily see the same increase in the total base. And second, I think we just need to create more visibility for the company. We have lost a little bit, over the last few years, visibility. Visibility doesn't necessarily mean you have to spend millions and millions of dollars on TV ads, but I think we have some smart ideas how we can create more visibility for the company. And I hope that will drive member growth.

But I want to say also one more thing about -- I also want to say one more thing about Asia because this was obviously not a good quarter for Asia. And I said we had a few operational challenges there, which will -- which affect us probably also in Q2, but we really see them as temporary. But on the grander scale, we really have increased the growth opportunity that we see in China. China outbound travel is booming. And in the past few months, I've been approached -- contacted a few times by several Chinese companies who want to work together with us. They see our tremendous network of hotels and Western partners and deal creation capabilities that we have developed, and they think there's a great opportunity to bring that to a broader market in China beyond our own members because -- you just talked about members, but in China, our member base is still relatively small. So we've looked and started to think about partnerships in that market. I think that's important. And I don't know, you might have also seen that we have nominated Carrie Liu, a Chinese national, to our -- to become a member of our board. She's an investment director at Fosun, which you probably know is one of the largest Chinese conglomerates and investment companies. And we really hope that this will help us on the board level to better understand that market and hopefully also establish some more relationships with companies in that area.

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Operator [8]

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

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Holger Bartel, Travelzoo Inc. - Chairman and Global CEO [9]

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Thank you, operator, and thanks, everyone, for your time and support. We look forward to speaking with you again in the next quarter. Have a great day. 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, and have a pleasant day.