Travelzoo Inc. (NASDAQ:TZOO), the global Internet media company, has registered a slight downfall in its stock price post the Q2 2012 earnings update on July 19. In the expected seasonally slow quarter, the company posted a marginal, sequential increase and a 5% y-0-y increase in revenues, though the EPS, at $0.45, was up over 50% compared to the same period last year. Despite the weak macroeconomic conditions, Travelzoo managed to grow its business both in North America and Europe. (Read: Despite Macroeconomic Headwinds Travelzoo Fares Well in North America & Europe)
The subscriber base in Q1 2012 grew by 9%, but the growth rate fell down to 1% in Q2 2012. However, at 22.1 million, the subscriber base stands close to Travelzoo’s 25 million milestone. The company remains focused on re-accelerating growth in subscriber base through incremental investment and ramping up its sales force.
We believe that focus on capturing additional opportunities through product innovation and leveraging its network to further distribute Local Deals and Getaways will help Travelzoo increase its subscriber base. Additionally, cross-promoting deal content between Travelzoo and Fly.com could bring in higher traffic to the company’s websites.
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Leveraging the Travelzoo Network to Increase Local Deals Distribution
Travelzoo’s Local Deals business, which provides subscribers with high quality local deals for restaurant, spa, activity, show or concert event, was launched in the third quarter of 2010. The company differentiates itself from group-buying sites like Groupon, Living Social and AOL’s Wow.com by leveraging its existing hotel relationships and growing subscriber base for other products like the Top 20 Newsletter.
Armed with strong management and a stable sales force division, Travelzoo deals reached 125 markets, with an approximate average deal size of 25,000 in the second quarter. While the North America revenues registered an increase of over 15% y-o-y, Europe witnessed a relatively flat quarter, although the Local Deals revenue grew 28% y-o-y.
In addition, the company saw greater success in distributing Local deals and Getaways on other websites such as The Los Angeles Times, Lonely Planet and The New York Times via the Travelzoo network.
Travelzoo has been focusing on extending its reach to additional U.S., Canadian and European cities while, at the same time, aiming to increase deal frequency and revenue per market. We estimate Local Deals to contribute over 22% to Travelzoo’s valuation and estimate the number of deals per market to substantially increase by the end of our forecast period.
Improved Deal Content To Increase Traffic Flow
Travelzoo’s search division includes revenues from both Fly.com, a travel search engine, and Supersearch, a pay-per-click travel search tool. Providing an easy way for users to compare airfares, hotels and car rental prices, these search products complement Travelzoo’s business.
By showing results from all major online travel agencies in one view, Fly.com claims to be the most comprehensive airfare search engine in the United States, competing directly with travel meta-search engine providers such as Kayak (NASDAQ:KYAK). Fly.com gives users the ability to compare prices from all the major U.S. online travel agencies including Expedia (NASDAQ:EXPE), Priceline.com (NASDAQ:PCLN), Orbitz, Travelocity, Hotwire and CheapOair.
Travelzoo recognizes Fly.com as a meta-search opportunity with attractive economics, and is creating synergies with its own travel business offerings like the Top 20 newsletter. Though revenues from these search products registered a sequential and y-o-y decline in Q2 2012, we believe this segment offers a growing opportunity for cross-promoting deal content between Travelzoo and Fly.com. An improvement in deal content could lead to higher traffic flow to the company’s websites.
We are in the process of updating our current price estimate of $30.38 for Travelzoo.