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Edited Transcript of TZOO earnings conference call or presentation 25-Apr-19 3:00pm GMT

Q1 2019 Travelzoo Earnings Call

NEW YORK Apr 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Travelzoo earnings conference call or presentation Thursday, April 25, 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

* Wayne Lee

Travelzoo - Interim CFO

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Conference Call Participants

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* Edward 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. Welcome to Travelzoo First Quarter 2019 Financial Results Conference Call.

(Operator Instructions)

Today's call is being recorded. The company would like to remind you all 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 the conference will be made available to Travelzoo's Investor Relations website at travelzoo.com/ir.

Now it is my pleasure to turn the floor over to Travelzoo's Global Chief Executive Officer, Holger Bartel; and Travelzoo's Chief Financial Officer, Wayne Lee, who will start with an overview of the first quarter 2019 financial results.

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Wayne Lee, Travelzoo - Interim CFO [2]

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Thank you, Victor. 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. Travelzoo's revenue for the quarter was $30.8 million, down $59,000 year-over-year in nominal terms, but up 3% in constant currencies.

Our diluted earnings per share for the quarter was $0.26, a year-over-year increase of $0.06. Our global number of members was 29.9 million, up 200,000 year-over-year and our social media followers and mobile app downloads continues to grow.

Slide 4 details our revenue by segment. Revenue in North America was flat year-over-year at $18.6 million, but increased by 1% in local currency. Revenue in Europe was $10.6 million, representing a year-over-year increase of 3% in nominal terms and an increase of 10% year-over-year in local currency. Revenue in Asia Pacific decreased year-over-year from $2 million to $1.7 million, which is 18% lower in nominal terms, but just 13% in local currency.

On Slide 5 we would like to highlight the strong performance in our core businesses in North America and Europe, which is overshadowed by our investments in Asia Pacific. Revenues, operating income and EPS are growing and operating margins in these businesses are running at an annual rate of 16%. Earnings per share after tax from North America and Europe were at $0.96.

At the level of the Group, the operating losses in Asia Pacific result in much smaller profits and margins. Furthermore, losses in Asia Pacific cannot be used to offset taxes in North America and Europe. This results in a high effective tax rate on corporate earnings, which will decrease as losses in Asia Pacific shrink.

The next few slides cover further detail of our revenue for each of our 3 segments.

Slide 6 shows North America revenue of $18.6 million. Revenues from our travel products increased 2% year-over-year. Our local revenue decreased from $2.5 million to $2.3 million.

Turning to Slide 7. Europe revenue increased from $10.3 million to $10.6 million. In constant currencies, our travel products grew 13% year-over-year as a result of an increase in revenue from our new vacation offerings that combine hotel deals with flights.

On Slide 8, Asia Pacific revenue was $1.7 million, down from $2 million in the prior year period, due in part to turnover in our sales team and phase-out of local offers in markets that are too small.

Slide 9 provides a breakdown of our operating income. North America generated profits of $4.5 million and Europe generated profits of $2.1 million. This combined operating income of $6.6 million was partially offset by Asia Pacific's operating loss of $1.6 million, resulting in total segment operating profit of $5 million. Income taxes were $1.8 million, which represents tax on North America and Europe profitability with no tax benefit from Asia losses, given these are in separate tax jurisdictions.

Operating income improved year-over-year by $1.3 million, resulting in $3.1 million of net income.

Slide 10 shows the cost of revenue and operating margin. Cost of revenue as a percent of revenue decreased to 9.6%. Our company-wide operating margin increased from 11.8% to 16.1%, as a result of lower cost of revenue and lower operating expenses.

Slide 11 presents our operating expenses by segment. Operating expenses as a percent of revenue decreased in North America and Europe. Operating expenses in Asia Pacific decreased year-over-year, but as a percentage of revenue increased due to lower revenues.

Slide 12 shows that our productivity continues to improve over time.

Moving to Slide 13. We continue to use our solid cash position for stock repurchases and ended the quarter with cash of $19.9 million, up from $18 million at the end of Q4, 2018.

Turning to Slide 14. In constant currency, year-over-year revenue grew at 3% with Europe posting double-digit growth. We saw our highest operating profit and operating margin in over 4 years even with our continued investment in Asia Pacific and our products. Finally, we have maintained our solid cash position enabling us to repurchase our stock.

Looking forward, we expect the following: We expect year-over-year revenue growth to accelerate with Europe continuing to grow revenues in local currency at a double-digit rate. As we extend our vacation package offerings from Europe into other countries, particularly the U.S., we expect North America revenue to increase as well. We plan to maintain our investment in Asia Pacific, but are aiming to reduce losses in this segment. Overall, as revenues grow, we are also aiming to increase operating margins in 2019 versus last year.

Now Holger will provide you an update on why we believe Travelzoo's global brand and service will become increasingly relevant for consumers in the tourism industry and provide you an update on our investment in the Asia Pacific region.

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Holger Bartel, Travelzoo - Global CEO [3]

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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, leading to environmental and social problems. The problem was first covered in 2017 in a report by McKinsey & Company in the World Travel and Tourism Council. By 2020, the 20 most popular countries will have more international arrivals than the rest of the world combined.

Studies show it will become increasingly important for consumers to see alternative choices of destinations and this is exactly what Travelzoo has always been specializing in. It is just becoming more relevant. When promoting destinations with excess inventory, Travelzoo has always managed to provide its members with irresistible offers. Travelzoo proposes a sustainable and achievable strategy to help match the demand with the supply by negotiating special offers with hotels, airlines and local businesses for its members to enjoy quality travel at lower prices than when they visit lesser-known destinations or explore popular places during off-seasons.

Travelzoo leverages its know-how to set trends, stimulate and direct demand as well as enables members to enjoy destinations in a creative, smart and responsible way.

Lastly, I would like to reiterate a few words about our business in Asia Pacific. Travelzoo is committed to driving up shareholder value by implementing a successful strategy to achieve profitable growth in Asia Pacific faster.

Therefore, the company has launched a project, Asia Pacific 2020, to define a better go-to-market approach, to build alliances with local partners and to rapidly scale up in an economically smart way to arrive at profitability.

We have appointed Scott Wang as Head of Strategy, Asia Pacific, and General Manager Greater China, effective May 22, 2019. Scott joins Travelzoo from Wiley, a global publishing company where he worked for 5 years as VP, International Development in Asia Pacific and China Country Head. Under his leadership, growth of the company's core business in China was accelerated, while a collaborative and entrepreneurial culture was established.

In the newly-created role of Head of Strategy, Asia Pacific, Scott is responsible for developing and executing travels with growth strategy in Asia Pacific to reach profitability. He will also oversee daily operations of the business in greater China, with profit and loss responsibility as General Manager Greater China.

In leading the Asia Pacific 2020 project, Scott will be joined by 3 experienced staff from Travelzoo's Europe and North America operations across key functions.

Travelzoo's Board of Directors and management have made Asia Pacific a priority. We set an ambitious target and firm time line for creating shareholder value from the company's investments in this geographic region. Strategic alliances with local partners will be considered.

Now back to the operator. Operator?

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Questions and Answers

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Operator [1]

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

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

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Congratulations on the quarter. My question is more on the travel industry in general. What are you seeing out there in the travel industry and how do you think the summer travel season will play out this year?

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Holger Bartel, Travelzoo - Global CEO [3]

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Ed, look, demand for travel continues to grow around the globe, and this is driven by an increasing number of consumers who have more time and more available income to spend on travel.

Also in recent years and due to the surge in social media, travel has become one of the most important, if not the most important lifestyle categories. At the same time, as I said, we see a trend of overcrowding of destinations. This trend will continue to grow in importance, and Travelzoo is well positioned to help destinations and travel suppliers to better balance supply and demand.

So regarding summer, we see all of these trends coming together. Some popular destinations will become even more popular, we will see more overcrowding. But at the same time, we drive demand for destinations that are less popular in the summer months.

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Edward 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. In terms of -- you mentioned overcrowding. In terms of -- how much of a problem you think it's going to be where you may run out of capacity at the offered destinations that it may affect the people's ability to travel or do you think that you as well will have growth by being able to just shift out to other locales?

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Holger Bartel, Travelzoo - Global CEO [5]

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Well it's already a problem today, and the report from McKinsey and the Tourism Council say that the problem will increase, it's not going to increase and become more important from today to tomorrow, but in the next few years it will become increasingly a problem and our products and particularly some of the newer products that we have launched like our vacation package offering allow consumers to exactly make a choice. Do I want to go to a very expensive destination where everybody is heading, or do I rather want to explore something that is new where people haven't been going so far?

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

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Great. And then moving to a slightly different topic, alternative accommodation, there has been a rise of Airbnb and other booking agents that are focused on renting houses and condos as vacation rentals. Has that affected your business and are you going to be able to include that in some of your packages where you have had a lot of strength?

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Holger Bartel, Travelzoo - Global CEO [7]

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It's not yet, Ed. It's important for the large online travel agents to provide as much inventory and as much opportunity for people to stay as possible; that's part of their strategy. For us, the strategy is really more to stimulate demand, to drive demand and drive business into places and destinations that are not busy. So far, the alternative accommodations don't play a big role for us, but I would assume this will increase over the next few years.

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Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media [8]

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Great. And my last question is just on the issue going on with the Boeing 737 Max. Has there been any impact on business at all on that?

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Holger Bartel, Travelzoo - Global CEO [9]

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Not on us. We have not seen anything in that respect.

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Operator [10]

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Okay. I will turn it back now to Mr. Holger Bartel.

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Holger Bartel, Travelzoo - Global CEO [11]

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Thank you, everyone. Ladies and gentlemen, for dialing in and for your time and support. We look forward to speaking with you again next quarter. Bye.

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Operator [12]

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