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Edited Transcript of TZOO earnings conference call or presentation 6-Feb-19 4:00pm GMT

Q4 2018 Travelzoo Earnings Call

NEW YORK Feb 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Travelzoo earnings conference call or presentation Wednesday, February 6, 2019 at 4:00:00pm 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 the Travelzoo Fourth 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.

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 fourth quarter 2018 financial results.

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Wayne Lee, Travelzoo - Interim CFO [2]

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Thank you, Mark. 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 increased to $27.1 million, up $65,000 year-over-year in nominal terms, and up 2% in constant currencies. Our diluted earnings per share for the quarter was $0.13, a year-over-year increase of $0.08. Our global number of members was 29.7 million, up 300,000 year-over-year and our social media followers and mobile app downloads continue to grow.

Slide 4 details our revenue by segment. Revenue in North America increased year-over-year from $16.2 million to $16.3 million and by 1% in local currency. Revenue in Europe was $9 million, representing a year-over-year increase of 3% 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 $1.8 million, which is 10% lower in nominal terms, but just 7% 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 often overshadowed by investments in Asia Pacific. Revenues, operating income and EPS are growing and operating margins in these businesses are running at 14%. Earnings per share after tax from North America and Europe were at $0.88.

At the level of the group, the operating losses in Asia Pacific result in much smaller profit and margin. Furthermore, losses in Asia Pacific cannot be used to offset taxes in North America and Europe. This results in a much higher effective tax rate on corporate earnings. The next few slides cover further detail of our revenue for each of our 3 segments.

Slide 6 shows North America revenue of $16.3 million. Revenue from our core products increased year-over-year in spite of the loss of a large customer at the end of last quarter, but we are looking to get back to faster growth in 2019. Our Local revenue decreased from $3.3 million to $3 million due in part to lower revenue from entertainment offers during the quarter.

Turning to Slide 7. Europe revenues was $9 million with particularly strong revenue growth from our Local product.

On Slide 8, Asia Pacific revenue was $1.8 million, down from $2 million in the prior-year period. We were operating temporarily with the smaller sales team in China, which affected revenues versus the same quarter a year ago. Our revenue in China decreased 29% year-over-year, while revenues in other markets, such as Japan, Hong Kong and Southeast Asia increased.

Slide 9 provides a breakdown of our operating income. North America generated profits of $2.7 million and Europe generated profits of $1.6 million. This combined operating income of $4.3 million was offset by Asia Pacific's operating loss of $1.5 million, resulting in total segment operating profit of $2.8 million. Income taxes were $1.2 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 $1.7 million, resulting in $1.6 million of net income.

Slide 10 shows the cost of revenue and operating margin. The cost of revenue as percent of revenue decreased to 10.6%. Operating margin increased year-over-year as a result of the decrease in cost of revenue as percent of revenue and lower operating expenses.

Slide 11 presents our operating expenses by segment. Operating expenses as a percent of revenue decreased in all 3 of our segments.

Slide 12 shows that our productivity increased year-over-year.

Moving to Slide 13. We continue to use our solid cash position for stock repurchases and ended the year with cash of $18 million.

Turning to Slide 14. While our overall revenue increased slightly, we saw significant year-over-year improvement of operating profits and margin even with our continued investment in Asia Pacific and our products. Finally, we have maintained a solid cash position enabling us to continue our stock repurchases.

Looking forward, we expect the following: For the first quarter of 2019, we expect year-over-year revenue growth to reaccelerate with Europe growing revenues in local currency at a double-digit rate. For the entire year, we expect revenue to grow in the upper single digits as we extend our vacation package offerings from Europe into other countries, particularly the U.S.

We're planning to increase our marketing spend across most markets and particularly in Q1, and we plan to maintain our investments in Asia Pacific. We're aiming to reduce losses in this segment and turn it profitable within 2 years. Overall, we are aiming to increase operating margins in 2019 versus last year.

We expect the year-over-year growth in earnings, which we have seen in 2018 to continue in 2019, particularly in the second half of the year. We aim to maintain positive operating income, while we will selectively reinvest in our business in areas as described to support future growth.

Now Holger will provide you an update on why we believe Travelzoo's global brand will become increasingly relevant for consumers and the tourism industry.

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Holger Bartel, Travelzoo - Global CEO [3]

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Good morning. We see that global tourism industry increasingly talking and becoming worried about an overcrowding of destinations. Is this trend in tourism a threat or an opportunity for Travelzoo? We believe this trend presents an opportunity for us, and I would like to speak with investors today because it is important to understand what the trend of overcrowding means for the Travelzoo business.

Industry research, for example, the recent study conducted by McKinsey & Company and the World Travel and Tourism Council are confirming a trend towards overcrowding of a few top destinations in the world, while most other destinations existing or newly created are substantially lacking demand from travelers. Overcrowding is a global problem.

Increasingly, there is a need to spread visitors across destinations worldwide and to smooth visitors over time by encouraging them to visit during nonpeak times. We believe that overcrowding presents a substantial opportunity for Travelzoo to create value.

What the Travelzoo brand has always done best is to inspire people, inspire our members to get off the couch, as our founder always said, and visit destinations, which they have not thought of going to or traveling at times when they have not thought of traveling. In our 20-plus business, we have built deep know-how to get people off the couch and thereby create new and different demands for the industry.

We see Travelzoo's mission and business activity becoming increasingly relevant these days. We help destinations to spur demand, and we help travel suppliers to create demand and fill those airline seats and hotel beds at times when they would go empty. This is different from traditional travel websites, booking engines, online travel agents or even search engines, which simply allocate existing demand towards suppliers.

Management also believes that our global presence positions us well to make an impact on the flow of tourists in today's global tourism industry. With more than 25 offices worldwide, the Travelzoo brand and company has its finger on the pulse of outstanding travel, entertainment and lifestyle experiences. Working in partnership with more than 2,000 top travel suppliers around the world provides Travelzoo members the very best inspirational offers always carefully reviewed and test booked by our global team.

Lastly, I would like to reiterate 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.

We've launched a project called internally Asia Pacific 2020. We will shortly announce an experienced executive we have recruited to lead the project, who will be joined by 3 staff from Travelzoo's key functions in Europe and North America who know Travelzoo's business well.

The project team will outline a clear path to profitability and manage execution. It will also look into various partnership opportunities, particularly in China in order to grow scale more rapidly in this large opportunity market. Travelzoo's Board of Directors and management have made Asia Pacific a priority. We set an ambitious target and a firm deadline for creating shareholder value from the company's investments in this geographic region.

Now back to the 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 Ed Woo of 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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My question is more on generally the travel industry. Have you noticed any changes in the travel industry, particularly when we saw some of the volatility in the financial market at the end of the year?

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Holger Bartel, Travelzoo - Global CEO [3]

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Ed, so in Europe, travel is going very strong. Over the last 2 years we had a situation where people were afraid to travel to certain destinations, that is changing. Travelers are now going again to places like North Africa, Egypt, Turkey and so forth and that spreads demand over a lot of different places where travel -- where people travel to. North America, the good economy is making people travel also more. So there we have not really seen anything from -- we haven't really seen an impact from what happened in the financial markets over the last few months. In fact, we see that travel is becoming something that people want to rather do more than invest or buy goods or luxury purchases, things like that. I would say the only area where we see a significant decrease in travel is China, consistent with what we have heard from other companies, we have more in step with the Chinese consumer who is hesitating to spend, but that might change at some point of time when the trade war between North America and China, or the U.S. and China I should rather say is coming to a conclusion.

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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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Sounds good. And then my next question is more on competition. Have you noticed any change in the competitive landscape? Or has it been relatively steady?

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Holger Bartel, Travelzoo - Global CEO [5]

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You know what is interesting is, I just talked about the value that we are creating for the travel industry and for suppliers. One thing that we have seen is actually that some of the travel suppliers have gotten -- have acquired some of -- a couple of smaller competitors that we have had in Europe. So in France, there's a hotel chain that made an acquisition. It doesn't seem like that's really changing the business, but what it really confirms is that suppliers really need this -- this service that we provide and that I was just talking about to stimulate demand at times when they need to fill their hotels or the airlines when they need to fill their airline seats. Otherwise no, there has not been any significant change in the competitive landscape, particularly because we do something quite different than what some -- what a lot of the other travel sites and particularly big OTAs are doing.

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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. So you've really seen no changes even with some of the direct suppliers in terms of moving stuff in-house or it's been pretty much stable?

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Holger Bartel, Travelzoo - Global CEO [7]

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Look, we are also sending business to suppliers directly. That's always something that we have done. So in that respect, suppliers like to work with us, OTAs don't do that. But in general from what I've seen from the research that I've seen and what we have experienced, consumers haven't significantly changed their purchase patterns and buy more directly from suppliers than from intermediaries. No, there's no change in the trend in spite of suppliers going out more aggressively with both advertising, marketing and with promotions to move buyers more directly to their sites.

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Operator [8]

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I'll turn back now to Mr. Holder Bartel.

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Holger Bartel, Travelzoo - Global CEO [9]

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Ladies and gentlemen, thank you, again, for your time and support. We look forward to speaking with you again next quarter. Goodbye.

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Operator [10]

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