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Edited Transcript of TZOO earnings conference call or presentation 23-Oct-19 3:00pm GMT

Q3 2019 Travelzoo Earnings Call

NEW YORK Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Travelzoo earnings conference call or presentation Wednesday, October 23, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Holger Bartel

Travelzoo - Global CEO

* Lisa Su;Chief Accounting Officer

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Presentation

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Operator [1]

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Hello, everyone. Welcome to the Travelzoo Third Quarter 2019 Financial Results Conference Call. (Operator Instructions) Today's call is being recorded.

The company would like to remind everyone 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 travelzoo.com/ir.

Now it's my pleasure to turn the floor over to Travelzoo's Global Chief Executive Officer, Holger Bartel; and its Chief Accounting Officer, Lisa Su. Lisa will start with an overview of the third quarter 2019 financial results.

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Lisa Su;Chief Accounting Officer, [2]

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Thank you, Michelle, and welcome to those of you joining us today. Please open the management presentation to follow along with our prepared remarks. The presentation in PDF format is available on our Investor Relations website.

Slide #3 provides the financial highlights for the quarter. All key metrics -- financial metrics continue to improve as revenues grow and we operated more efficiently. Travelzoo's revenue for the quarter was $25.5 million, up $204,000 year-over-year in nominal terms and up 2.4% in constant currencies. Our diluted earnings per share for the quarter were $0.03. Our global number of members was 30.3 million, up 500,000 year-over-year. And our social media followers and mobile app downloads continued to grow.

Slide 4 details our revenue by business segment. Revenue in North America was $15.3 million, a year-over-year increase of 3%. Revenue in Europe was $8.5 million, a year-over-year increase of 1% in nominal terms and an increase of 6% year-over-year in local currency. Revenue in Asia Pacific decreased year-over-year from $2 million to $1.7 million, which is 17% less in nominal terms and 16% less in local currency.

On Slide 5, we would like to highlight the positive performance in our core businesses in North America and Europe. Very good performance of our core business is masked by our development business in Asia Pacific. In our core business, revenues, operating income and EPS are growing and operating margins in those businesses are running at an annual rate of 18%. Earnings per share from North America and Europe for the trailing 12 months were at $1.12. On a consolidated level, operating losses from Asia Pacific result in much smaller profits and margins. Please also keep in mind, operating losses from Asia Pacific are currently not used to offset taxable income in North America and Europe. This results in a high effective tax rate on corporate earnings, which would decrease as losses in Asia Pacific shrink.

Slide 6 shows something we believe is very important for our future success. Increasing revenue and higher margins allow us to grow EPS even while investing in more brand marketing and member growth. As a reminder, we operate a business with mostly fixed costs. So higher revenues result in a proportionally much larger increase in EPS.

The next few slides cover detail of our revenue for each of our 3 business segments. Slide 7 shows North America revenues from our travel products increased 6% year-over-year to $12.9 million. Our local revenue decreased 10% year-over-year to $2.4 million.

Turning to Slide 8. Europe revenue increased from $8.4 million to $8.5 million. In constant currencies, revenues would have been $8.9 million. In constant currencies, our travel products grew 10% year-over-year as a result of an increase in revenue from our new vacations products. Our local revenue decreased 19% year-over-year.

On Slide 9, you see Asia Pacific revenue was $1.7 million, down from $2 million in the prior year period. We do not see this as a trend. We expect revenue from China to grow in the fourth quarter and also in 2020.

Slide 10 provides a breakdown of our operating income. North America generated profits of $2.5 million and Europe generated profits of $800,000. The combined operating income of $3.3 million was largely offset by Asia Pacific's operating loss of $2.1 million, resulting in total segment operating profit of $1.2 million. Income taxes were $770,000. Operating income increased to $1.2 million resulting in $306,000 of net income, an increase of 148% year-over-year.

Slide 11 shows the cost of revenue and operating margin. In spite of Asia Pacific, our overall operating margin jumped to 5% in our seasonally weakest quarter. Historically, in the third quarter of the year, our revenues are the lowest and earnings the smallest and not indicative of the entire year. Cost of revenue as a percentage of revenue decreased to 11.7% year-over-year. Our company-wide operating margin increased from 2.8% to 4.8% as a result of lower operating expenses.

Slide 12 presents our operating expenses by segments. Operating expenses decreased in North America. Operating expenses increased in Europe as we invested more in member acquisition, particularly in Spain and France. Operating expenses in Asia Pacific increased due to the completion of a strategy project with the top consulting firm in China. All costs of the project were expenses in Q3.

Slide 13 shows productivity of the organization increased compared to the prior year.

Moving on to Slide 14. Cash generated was used to make repurchases of Travelzoo common stock. We ended the quarter with a cash balance of $11.6 million.

Slide 15 provides a performance summary as the management of company sees it. Revenue growth improved in North America and Europe, but we are not yet at our 10% target. Operating margins in our core North America and Europe businesses were at 14%, and our net income more than doubled. Our operating profits increased by 70%. Our cash-generating business enabled us to make share repurchases.

Looking forward, we expect the following: For Q4, we expect revenue growth to be higher than in previous quarters this year. We also expect operating profits and margins to increase versus the fourth quarter of 2018. As we extend our vacation product from Europe into other regions, we expect North America, and particularly the U.S., to benefit from the expanded offering. We expect revenue in Asia Pacific to increase, especially our revenue from China, where we will focus on. For next year, we see an overall higher growth rate in revenues than in 2019, which will allow us to further improve our operating margin closer to 15% and continue to grow EPS even though we plan to invest more in marketing and member growth.

Now Holger will provide you an update on our business in Asia Pacific and explain why we believe Travelzoo's global brand and service is becoming more relevant for consumers and the tourism industry.

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Holger Bartel, Travelzoo - Global CEO [3]

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Thank you, Lisa. In the third quarter, we moved quickly and decisively in Asia Pacific. Never ever were we so focused on it. There are compelling reasons. First, after rigorous review of the market, our business model and Travelzoo's current position in the market, the third-party research and review confirmed an immediate, concrete opportunity to grow revenue from China very substantially. Second, we believe there will be a meaningful favorable impact on Travelzoo's reported EPS resulting from performance improvements in the Asia Pacific business segment.

Our new management team, which was installed in second quarter, worked in the third quarter with a top management consulting firm in China to develop together a strategy for a significant presence of Travelzoo in social media and mobile channels. The execution began in mid-September. China has the biggest social media community in the world and has the highest mobile penetration, which makes it also ideal for us as a global company to develop capabilities in these areas. As the financial performance of our Asia Pacific business will improve, we should see a meaningful increase in Travelzoo's reported EPS.

Lisa earlier highlighted that the trailing 12-month pro forma EPS from our attractive core businesses in Europe and in North America would be $1.12 without the operating losses from Asia Pacific. Our intention is to reach an even higher EPS in the next 2 years by further growing the business in Europe and in North America plus generating profits from the growing business in China.

Travelzoo is very creative in identifying and discover destinations and new ways to enjoy already popular destinations. What we do best is to generate and to influence demand among our members. And this advantage makes our brand more relevant than ever in tackling the challenges in today's tourism landscape. The global tourism industry is increasingly talking and becoming worried about overcrowding of destinations. Overcrowding of destinations means that too many tourists are traveling to the same destinations at the same time leading to environmental and social problems. The problem was first covered in 2017 in a report by McKinsey & Company and the World Travel and Tourism Council. By 2020, the 20 most popular countries will add more international arrivals than the rest of the world combined.

How to manage supply and demand strategically is the key question to answer for any destination throughout its development cycle. Travelzoo curates deals that allow our members to explore popular places during less busy seasons, also visiting new unique local attractions. In this case, Travelzoo will help manage demand and supply, planning in certain destinations as well as raising public awareness of the importance of sustainable travel.

Travelzoo is known for its creative travel ideas and inspirations. I want to say that we are always one idea ahead in finding the next interesting thing to do or interesting place to experience for our members. By leveraging our creativity in idea curating, we can help set the trend of sustainability in travel among consumers and the industry.

Now back to the operator.

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Operator [4]

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(Operator Instructions) There are no questions. I'll turn the call back now to Mr. Holger Bartel.

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Holger Bartel, Travelzoo - Global CEO [5]

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Well, ladies and gentlemen, thank you for your time and support, and we look forward to speaking with you again next quarter. Have a nice day. Bye.

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Operator [6]

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