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Investment Overview for Travelzoo (NYSE:TZOO)
WHAT HAS CHANGED?
Travelzoo posted a 8% year-on-year decline in revenue to reach ~$142 million in 2015. All three of Travelzoo's divisions: travel, search, and local deals, received a setback in 2015. Due to a lot of restructuring within the company, its apparent performance might not look too impressive. However, Travelzoo has started on a path of gradual recovery with several new initiatives. The company changed the formats of most of its offerings from a supply or pushed-based model to a demand or pull-based one. It witnessed gradual recovery of demand for its new hotel booking platform (introduced in 2014), it also reacquired its Asia Pacific business, and finally, made some key management changes.
The company is following a two-way strategy of expanding its member base (while focusing on the quality of the users) and improving its product offerings. Travelzoo’s hotel platform is witnessing increased demand and conversion rates and the company believes that its key differentiating aspects provide it with the opportunity for growth even in the presence of much bigger rivals. Due to a surge in operating expenses, Travelzoo's EBITDA margin for 2015 declined to 7.3%, as compared to 9.3% in 2014.
- Travelzoo's current focus is on its hotel booking platform
- Travelzoo’s hotel booking platform, introduced in 2014, started showing signs of growth only after it was reintroduced with richer content, pertaining to specific places in the U.S., in February 2015.
- Since then, the hotel booking platform has been gradually gaining traction and the management stated that the bookings on the platform have more than doubled over the last year, and have been showing no signs of slowdown till now. The conversion rates are also demonstrating growth.
- However, the revenue growth is yet to be seen since the revenue recognition through this platform is a lagged process because the company recognizes the commission after the completion of the hotel stay.
- Travelzoo reacquired its Asia Pacific business
- In August 2015, Travelzoo reacquired its Asia Pacific business primarily in order to explore the fastest growing Chinese outbound travel market. China is expected to account for almost one-third of the APAC travel market by this year. China’s online travel market is expected to keep reflecting double-digit growth and reach around $75 billion by 2017.
- Travelzoo recently announced major management changes
- The company announced some management changes in October 2015. Travelzoo’s CEO Chris Loughlin resigned and its chairman Holger Bartel assumed the position of the global CEO. Along with this, the company had announced the appointment of Mike Stitt as the president of Travelzoo North America. Finally, Vivian Hong, who headed operations in Travelzoo China, Hong Kong, and Taiwan was appointed as the president of Travelzoo Asia Pacific which along with the aforementioned regions also includes Australia, Japan, and Southeast Asia.
- Local Deals' business model focusing on demand based or pull-strategy
- Travelzoo’s Local Deals division’s lackluster performance had been attributed to the rigid voucher format for selling deals. The company is still on the lookout for a suitable alternative to the voucher format.
- Travelzoo is changing its deals’ selling model from a supply-based push strategy to a demand-based pull strategy. The March 2015 Local Deals performance has shown recovery after the removal of a few weak suppliers from the platform.
- Search segment receiving slightly more focus than before
- After several quarters of poor performance, Travelzoo’s Search division displayed better monetization of its Search traffic in Q1 2015. There was around a 4% year-on-year growth in Search revenue to ~$5.1 million for the first quarter of 2015. In view of its recovery, the management has decided to slightly increase its spend on the Search products, i.e., SuperSearch and Fly.com.
Below are key drivers of Travelzoo's value that present opportunities for upside or downside to the current Trefis price estimate for Travelzoo:
- Travel Related Revenues per Subscriber: Travelzoo saw its Travel Related Revenues per Subscriber fall from $3.75 in 2014 to $3.47 in 2015. Travelzoo introduced the hotel booking option on its websites in Q1 2014, bringing about a transformation in its previous business model with this option. The hotel booking platform enables users to book hotels directly via Travelzoo’s website or through mobile products, thus allowing suppliers to promote deals in a more flexible manner. On the flip side, the hotel booking feature is eroding the very aspect by which Travelzoo was differentiated from its peers in the online travel space. The discounted deals were the unique selling point for Travelzoo, which to some extent is being overshadowed by the recent developments on hotel booking. Initially, the platform failed to generate enough traction, due to a limited inventory of hotels available. The offerings weren’t attractive enough when compared to its competitors, hence Travelzoo’s management relaunched the platform with better content in the first quarter of 2015. The declining traction for Getaways, migration of more deals from the Getaway model to the new hotel booking platform, and the delayed revenue recognition from the hotel booking platform, have all dampened revenues from the Travel Segment.
If Travelzoo can reach the 2014 levels in its Travel Related Revenues per Subscriber by the end of our forecast period, there could be an approximate 5% upside to the Trefis price estimate for Travelzoo. On the other hand, if Travel Revenues per Subscriber declines at a much faster rate of around 5% per year instead of the currently assumed rate, there would be over a 15% decline in our current price estimate for Travelzoo.
- Average Revenue per Market per Week: Travelzoo's Average Revenue per Market per Week declined from $5,487 in 2010 to approximately $2,500 in 2015. The Local Deals division, which is mainly driven by a voucher format, is facing waning demand (the division reported over 15% decline in 2015). Travelzoo has started repositioning itself in the Local Deals segment by increasing the flexibility of its products. The company is molding its local deals to better align with changing consumer needs, by offering user demand-based deals versus forcing them to choose from whatever is available. Towards this end, it is increasing the number of live deals on its platform and is also trying to find an alternative to the rigid voucher format of booking.
If Travelzoo is able to maintain its average revenue per market per deal at $3,000, there would be a 15% upside to the Trefis price estimate for Travelzoo. However, given the declining trend in local deals revenue, if the average revenue per market per deal declines by 15% each year till the end of our forecast period, then there is a marginal downside to the Trefis price estimate for Travelzoo.
Travelzoo is a global internet media company. The firm currently has a subscriber base of around 28 million and has operations in North America, Europe, and the Asian Pacific region. Travelzoo provides travel and entertainment companies as well as small businesses the ability to efficiently reach out to consumers to sell their services and products. Apart from the main Travelzoo websites, the company also has several publications and newsletters across the globe which help it connect with its subscribers. It also operates Fly.com, a travel search engine that provides users the ability to find the best prices on flights from airlines and travel agencies. In August 2010, the firm ventured into the social commerce space by launching a local deals service which enables customers to purchase vouchers for local businesses such as spas and restaurants.
Travelzoo introduced the hotel booking option on its websites in Q1 2014. Travelzoo brought about a transformation in its previous business model with this option. The hotel booking platform enables users to book hotels directly via Travelzoo’s website, or through mobile products, thus allowing suppliers to promote deals in a more flexible manner. With the launch of the platform, hotels have the option of selling full-price stays under the commission based model.
Differentiation and prior local offers experience acts as a competitive advantage
Travelzoo is differentiating itself from group-buying sites like Groupon, Living Social, and AOL’s Wow.com by leveraging its existing hotel relationships and offering higher-end deals, often for hotel spas and restaurants.
The local deals business leverages Travelzoo’s subscriber base for other products like the Top 20 Newsletter by providing it access to big mailing lists, as well as serving as a great fit given its trained salesforce who have prior experience in selling local offers. This helps Travelzoo's local deals compete with larger competitors like Groupon right at an early stage.
Revenue synergies with other Travelzoo businesses to drive volumes for local deals
Travelzoo can package local deals with placements in the Travelzoo Top 20 newsletter, the company’s core product.
This will help Travelzoo expand its reach, thereby driving higher local deal volumes. Travelzoo's search engines, Supersearch and fly.com, which directs customers to ticket booking sites, can generate traffic for local deals as people also look for things to do upon arrival at a destination. The deals business can provide interesting entertainment and dining options. This presents an opportunity to leverage the expansion of search businesses by increasing the number of deals offered.
European online advertising growth to provide growth momentum
Travelzoo has more opportunities for subscriber growth and ad rate increases in Europe as the business in the European region is less developed than that in North America. There are over 15 million subscribers in North America compared to around 7 million in Europe. The biggest online markets by ad spend are the UK, Germany, France, Netherlands, Italy, and Spain, respectively. Together, the top six account for almost three-quarters of the total market. Travelzoo's European operations include its businesses in France, Germany, Spain, and the U.K, thereby enabling it to leverage the online advertising growth in Europe through its presence in the most attractive markets in the region.
Launch of hotel search to power search volumes growth for Fly.com
Initially, Fly.com was only an airfare search engine enabling users to find and compare flight options and real-time fares from hundreds of airlines and major travel websites. In November 2011, Travelzoo officially launched a hotel and car rental search functionality on Fly.com. After entering the search criteria, results can be filtered in several different ways to best fit traveler needs, including pricing, star-rating, location, amenities, and type of property (resort, hotel, B&B, or even hostel). Although Fly.com searches many hotel and online travel agency websites, users are encouraged to compare rates using the check boxes to find the best deal. Another key feature for travelers is extensive hotel detail pages that include virtual tours, detailed amenity checklists, hotel policies, and honest user reviews.
Unlike air ticket bookings, hotel reservations require the travelers to conduct an extensive search for the best fares. Fly.com simplifies a user's search by providing easy comparison of fares from different online travel agencies.
Increasing online advertising spend
According to Statista, the United States is the largest advertising market in the world with a market spend of $180 billion in 2015, more than double of that of China, the second largest market. The media advertising spending is forecast to reach $200 billion by the end of 2016. The growing presence of online advertising has impacted traditional media outlets such as TV and newspaper, which have seen a considerable decline in ad spending over the past few years. Online/digital media spending in 2015 is estimated to be ~ $67 billion.
- The internet is widely becoming the preferred source of information.
- Inherent benefits of online advertising (real time updates and performance tracking) vs. traditional media approaches.
- The internet allows advertisers to advertise their sales and specials in a fast, flexible, and cost effective manner.
- Suppliers are selling directly to consumers from their websites rather than through travel agents.
Economic weakness to weigh on advertising budgets
The advertisement business is also highly sensitive to economic downturns and the demand for online advertising is linked to the level of economic activity and employment in the U.S. and abroad. Travelzoo’s business model is highly dependent on online advertisements through travel, entertainment, and other small businesses. Since consumer spending on discretionary items is highly influenced by the state of the economy, future economic headwinds may impact ad spending by companies.
Growth in social commerce
The social commerce space is one that has demonstrated immense growth in the past few years. It provides customers with different options for restaurants, travel, and entertainment within their local cities. On the other hand, it enables merchants to promote their products and services quickly and efficiently to a mass audience.
BIA forecasted the US deals market to have reached $4.2 billion in 2015..
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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