Travelzoo Inc. (NSDQ:TZOO) reported its first quarter earnings with a 12% jump in revenues over prior quarter. The revenue growth was driven by European markets with a growth of 14% y-o-y. In anticipation of better revenue figures, the markets hammered the stock by 6% on the earnings release date itself. The company was able to generate GAAP net income of $3.7 million this quarter while booking a loss of $13.95 million last year. Facing stiff competition from Expedia (NSDQ:EXPE) and Priceline (NSDQ:PCLN), Travelzoo has been able to expand its subscriber base by just 9%. In terms of segment wise distribution, the search division led the revenues in North America with 29% increase in seasonal increase while travel division won in Europe with a 20% rise in revenues this quarter.
Focus on Operational Efficiency Amidst Trimming Profitability Margins
Competitive pressures on costs have already shown a declining trend towards advertising revenues/subscriber. The company started working on cost cutting measures in this quarter with operational expenses as a percentage of revenues falling from 89% to 73% in the European market segment. However, the company has not been able to achieve such efficiencies in the North American segment. In fact, the operational expenses have increased from 59% to 62% of the revenues in this segment. Going forward, Travelzoo is planning to focus on profitable growth and improved productivity.
The Trefis price estimate’s sensitivity to the EBITDA margins can be seen through the interface below:
Stimulating Subscriber Growth: The Way Forward
Facing intense rivalry from the competitors, Travelzoo’s 9% subscriber growth has fallen behind Trefis estimates. Considering the current subscriber base growth across 2012, the Trefis price estimate falls by 9.7% to $27. On the contrary, the company is setting up plans to ramp up its sales force by addition of 50 sales staff in the near future. In the deals space which forms 22.4% of the Trefis price estimate, the company is extending its reach to additional U.S., Canadian and European cities while increasing deal frequency and revenue per market. Further, the company also believes that there could be additional opportunities in the marketplace with competitors going out of business.
We have a Trefis price estimate of $30.30 for Travelzoo, which implies 21% above stock’s current market price. Currently, we are in the process of updating the Trefis price estimate in accordance with the recent events.