Travelzoo
Q2 2018 Earnings Call Transcript

Published: 25 Jul 2018

[Operator:]

Hello, everyone. Welcome to the Travelzoo Second Quarter 2018 Financial Results Conference Call. All participants have been placed in a listen-only mode and the floor will be open for questions following the presentation. Today's conference 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 fact constitute forward-looking statements and are made pursuant to the Safe Harbor provision 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 rather as a result of new information, future events or otherwise. Please refer to the company's Web site 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's Investor Relations Web site at www.travelzoo.com/ir. Travelzoo's CFO Glen Ceremony will start with an overview analysis of the second quarter financial results.

[Glen Ceremony:]

Thank you, Michel, and welcome to those of you joining us today. For the format of today's call, I will review our second quarter financial results and then Holger will provide you an update on our business initiatives. Thereafter, we will open the call for our question-and-answer session. Please open our management presentation, follow along with our prepared remarks. Our presentation is available on our Investor Relations Web site. To begin let's turn to Slide 3, which provides the key financial highlights for the quarter. Our revenue for the quarter grew to $28.1 million up 6% year-over-year in nominal terms and up 4% in constant currencies. Our diluted earnings per share from continuing operations for the quarter was $0.04. 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 $17.5 million representing a year-over-year increase of 6% in nominal terms or 5% on a constant currency basis. Revenue in Europe was $8.5 million representing a year-over-year increase of 8% or 1% on a constant currency basis, which is the first year-over-year growth for Europe in two years. Revenue in Asia Pacific was $2.1 million representing a year-over-year increase of 6% or up 2% in constant currencies. Slide 5 illustrates that our financial performance and net income is increasing in North America and Europe while Asia Pacific is still in investment mode. Keep in mind that the losses for our Asia Pacific business are not deductible for tax purposes, which explains our high effective tax rate that currently runs at close to 60%. As profitability in Asia improves, the effective tax rate will decline significantly. The next few slides cover further detail of our revenue for each of our three segments. Slide 6 shows North America revenue of $17.5 million. Revenues from our core products increased year-over-year due to increasing activity of our members, advertisers and partners. Turning to Slide 7, Europe revenue was $8.5 million, revenue from our core products grew, the FX impact was positive and local revenue was essentially flat. On Slide 8, Asia Pacific revenue was $2.1 million which is the second consecutive quarter of year-over-year growth driven by improvements in Hong Kong and Australia as well as positive FX impact. Slide 9 provides a breakdown of our operating income. North America generated profits of $2.1 million and Europe generated profit of $500,000. This combined operating income of $2.6 million was offset by Asia Pacific operating loss of $1.5 million for a total segment operating profit of $1.1 million. Income taxes were $600,000 and operating income was relatively flat with last year at $500,000. Slide 10 shows the cost of revenue and operating margin. The cost of revenue as a percent of revenue decreased 1.5 percentage points to approximately 10.7% due to our focus on efficiently servicing our members and lower voucher and syndication payments. The operating margin decreased as a result of our increased marketing this quarter. Slide 11 presents our operating expenses by segment. North America and Europe operating expenses as a percent of revenue were flat in spite of increased advertising in North America and Asia. Slide 12 shows that our productivity improved year-over-year with relatively flat headcount. Moving on to Slide 13, our solid cash position and positive operating cash flow helped us fund an equity investment in a weekend oriented travel app and technology. Turning to Slide 14, in summary, the financial performance driven by our core travel products continues to improve and generate profit to help further investment in our products and marketing. Our overall revenue growth continued and revenue increased in all regions. We continue to generate operating profit despite our stepped up marketing and further investments in Asia and our products. And we maintained our solid cash position with positive operating cash flow. Looking forward, we expect the following

[Holger Bartel:]

We are pleased with the progress that we are making in our goal to build Travelzoo into a much larger global and highly profitable travel membership organization and community. Revenue growth has resumed or accelerated in almost all markets that we are operating in and our focused investments in product and technology is 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 even faster in the second half of 2013, and then in 2019. From Slide 15, I would just like to highlight two initiatives that are under way, which I believe will increase member activity and revenue growth. We are close to launching the global technology that we've been working on that offers our members who live around the world the ability to book the hundreds of exclusive hotels, yes, we negotiate every month also as complete trips. We have found and tested 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 a hotel only rate, but a package that includes hotels, air fare 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 are rolling out this technology in select markets in Europe this quarter starting in Germany a couple of weeks and this does not mean that we are looking to become tour operate 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 for them to take advantage of a fantastic deal. On the marketing side, we have started to beef up our marketing teams around the world. 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 skill. We are finding that partnerships with strong brands are effective and cost efficient way to reach new audiences and build out our reach. To further support both of these initiatives we have strengthened our executive team by recently bringing in a Global Head of Brand and a seasoned Chief Technology Officer. To summarize again 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 my goal is still to double the size of the company in the next few years. This will require some investments but as we have done in the past we will do this in a smart way while maintaining and even increasing profit margins. Now back to the operator.

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from the line of Ed Woo with Ascendiant Capital. Your line is open. Please go ahead.

[Ed Woo:]

Thank you for taking my question. I have a general question on the travel industry. What are you seeing out there? Are you seeing any impact from I guess the stronger dollar?

[Holger Bartel:]

In general the travel industry is improving in many of the regions because there's less reason now for people not to travel to certain countries. So for example, in Europe where we really saw a trend in the last couple of years after a lot of the terrorist attacks and fear of people to travel to certain countries that's normalizing. So that's very good. Travel from the U.S. to Europe is quite strong because I think the strong dollar is a good explanation for that. And last but not least, the travel that we are seeing from Asia and particularly China into Europe and North America continues to increase and interestingly the Chinese tourists don't travel simply just to destinations like Rome or Paris, but now they are open to travel into destinations that maybe they didn't think about so much before, which I think is a good opportunity for us to make our Chinese members a way of -- deals and offers at places that they maybe were not so familiar with. So that's a good trend for us.

[Ed Woo:]

Great. Then I have some question on -- you mentioned some of the personal travel offers were in part tour operators. How is that different than what was done previously and how much personalization can you -- you want to add versus just sending on a email to [indiscernible]?

[Holger Bartel:]

So the main point of that is really to make an offer more relative -- first step of the packaging technology that we are about to launch is to make an offer more relevant for our member. So we are member right now in let's say Cincinnati, Ohio, you would have received from us up to-date hotel so we might tell you, hey they have a great hotel in New York, but you might need to go and seek out yourself how to book the air fare. We will make it very easy to tell you; look here you can book an entire trip, you can add on your flight, you get a great deal on it and we tell you even what are the best dates to do that. Previously if you were a member in Cincinnati, you might also receive offers that depart from New York or Chicago or San Francisco. And you really wouldn't have no one to know what is the price and the relevant offer for you without going and asking. So I think that's much more convenient. Now that we are able to further personalize and target the messages to our members. We are in a good situation to really leverage the information we have helping our members to further personalize these offerings and particularly the messages that we send to them outbound.

[Ed Woo:]

Is it that much more expensive or time consuming to be able to like you said send a deal or air fare from Cincinnati versus being able to send it just from a major airports was obviously since cargo base are scattered throughout the country. I would imagine you probably want few much on events and hotel at the location, but the air fare is going to be very, very personal for that specific location, how much more effort there is costs for you to do that.

[Holger Bartel:]

It's not difficult on the publishing front. We can do that already today. We have done that for many years. So that's not an issue for us. We have the technology. What's new is that we now have the technology to real-time bundle the hotel deal that we have in New York with current air fares and that's what's really new and that is actually automated. So our role is simply to review and say and confirm, yes, this is a good offer but this technology really simplifies our operations and makes them more efficient.

[Ed Woo:]

Great. Let me ask a different question. Your local deals have kind of more focused recently. What is your take rate, have they changed at all now that you are becoming much more focused much more personalized rather than you have much more broader? Has it changed at all?

[Holger Bartel:]

Take rates hasn't changed much in the last few years, really no big differences there. But I'm very happy that local deals grew by 10%, for example in North America this quarter. And that's really an attribute to the great team they have in place. We have now really good team, who bring amazing offers for our members and they're just starting to pay off. So thanks and shout out to the team there.

[Ed Woo:]

Great. And as you guys are almost rolling transmission business from kind of advertising model to part of conversion model. What about the overall economic outlook. I think previously that the margins are much higher when you -- conversion when you are doing a -- booking into a hotel. But, what do you see as the overall kind of margin impact -- your transition [indiscernible] paid for conversion or booking that deals [indiscernible] like in advertising?

[Holger Bartel:]

You are right. The margins are indeed lower if you sell something yourself, which is why we decided in hotels, we actually built entire infrastructure to allow our members to book hotels through us. We built it all ourselves was a big investment. It's time now when I came back as CEO, I said we want to do it differently with packaging, we are actually doing it with partners. We have some great partners out there we are working with and on deals and the way the terms are negotiated our margins on that are actually quite good. Keep in mind the margin on these products is a margin on the net revenue. So the net revenue is actually what we would report as revenue and the margins on that is actually quite comparable to the media business. So we really learned from hotels and we have to do it differently at this time for packages. But let me also make a few generic comments Ed because I'm obviously not happy about the stock price today. There's just too much volatility. And obviously that's self-inflicted by the large swings in EPS going from $0.20 in the first quarter to $0.04 now. And now it's disappointing because our business continue to grow at the same pace in Q1, in some areas even grew faster. But we increased that spend by $1 million and that's what impacted earnings and now we see the results and the stock price. As a CEO obvious I need to do what I think is right for the company in the long run, but I think we also need to be better at managing quarters. And as I said earlier, I want to double the business, the size of this business in the next few years. But one thing that's important to understand is as we grow revenue from $100 million to $150 million and hopefully to $200 million, operating margins will really improve. This is the business that have scale, our operating costs are mostly fixed and if you look back at Travelzoo's history in periods when we had fast growth, our earnings improved even further and even faster than revenue. So historically our operating margins were running at something like 15% to 30%. And no we really should get back to that level. So how are we going to achieve that? Well, first of all, we have APAC, where losses will not continue forever. Right now, we are investing, we keep incurring losses, these losses aren't tax deductible. So that really brings down our EPS quite significantly. As the performance in Asia Pacific improves as revenue grows and margins are coming up and we finally make a profit. That will change the financial picture of the entire company quite dramatically and that can happen relatively fast. Second, I'm really excited about this packaging technology because we have actually tested it in a few markets and we have seen that if we promote this packaging product rather than just the hotel, members are buying several times more frequently. And third and fourth we have a couple of other strategic areas that we are focusing on, but I don't really want to talk about them publicly too much because I don't want to tell our competitors what we are planning to do. But overall, our goal is still to bring revenues up significantly, improve operating margins, which I think will come quite a bit as we continue to grow the revenue. And we've shown in the last three quarters revenue is going up again and this will continue and we still hope that in 2019 that will even further accelerate.

[Ed Woo:]

Very well. Thank you for your clarification and for answering my questions and I wish you guys good luck. Thank you.

[Holger Bartel:]

Sure. Sure. Thanks Ed.

[Operator:]

Thank you. And I'll turn back now to Mr. Holger Bartel for closing remarks.

[Holger Bartel:]

Okay, ladies and gentlemen, thank you for your time and support for dialing in and we look forward to speaking to you again next quarter with better results. I hope okay. Bye.

[Operator:]

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