Travelzoo’s Current Investments Sow The Seeds For Future Growth

by Trefis Team
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TZOO
Travelzoo
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    Quick Take
  • Travelzoo reported its Q2 2013 earnings on July 18, reporting revenues grew 5% y-o-y as vacation packagers and cruisers opened their wallets more
  • Operating margins continued to decline as expenses rose on account of sales force expansion, marketing and product development
  • We feel that audience engagement strategies across mobile, social media and e-mail will boost revenue in the future
  • We also estimate the average revenue per deal and take rate for local deals will decline in the long run due to heightened competition
  • Profit margin will remain low in the short term due to increase in investments, but we expect it to improve in the long term

Continuing the growth momentum gained in the previous two quarters, Travelzoo (NASDAQ:TZOO) posted 5% annual growth in its Q2 2013 revenues ($41.3 million). This was backed by higher spending by vacation packagers and cruisers and continued growth in Getaway voucher sales for hotels, both in North America and Europe. While growth in North America was offset by a reduced number of local deals vouchers sold per deal, European revenues were impacted by a decline in search revenue driven by lower marketing spend.

Though the continued investment in its sales force expansion, marketing and product development led to decline in Travelzoo’s current operating income, we believe the above measures are important to drive future growth in its business. With focus on strengthening the hotel business and mobile and social integration, Travelzoo is in a good position to leverage future growth in the online travel industry.

See our full analysis of Travelzoo

Focus on Audience Engagement Through Product Development To Boost Revenue

Given the nature of its products, the company has seen an increase in the audience accessing its services through mobile devices. Travelzoo registered a significant increase in mobile traffic, which grew to 40% (of the total traffic) in Q2 2013, from 25% in the same quarter last year. Additionally, downloads for its mobile iPhone and Android apps experienced about 100% growth y-o-y, reaching 2 million. The company also saw a record number of visits on social media with approximately 1.5 million combined Facebook fans and Twitter followers at the end of the quarter.

Seeing the current trends in mobile and social media hold, Travelzoo has decided to shift its mode of communication with subscribers from e-mail only to a balanced approach across mobile, social media and e-mail in order to lift consumer engagement levels. It plans to achieve this by focusing on product development that will simplify ease of use and create better visual presentations. This was the primary motive behind the decision to launch its new hotel booking platform as it will allow users to quickly and easily book hotels within Travelzoo’s websites and mobile products. The company also remains committed to driving audience growth and engagement across the social platform to build its global brand.

Historically, audience growth has been a key driver of revenue growth for Travelzoo. While the company’s planned audience engagement strategies will require investments in marketing, sales force expansion and product development, limiting short term growth, we feel this will help drive revenue upwards as users get to access Travelzoo’s products via different channels.

The following table summarizes our forecast for Travelzoo’s revenue:

2011 2012 2013 2014 2015 2016 2017 2018

2019

148 151 171 185 196 203 209 215

221

Local Deals Business Slowly Losing Its Sheen To Competition

Travelzoo added 0.5 million subscribers in Q2 2013 and experienced a greater number of returning subscribers buying local and getaway deals than any previous quarter. However, the positive impact of the same was offset by decline in average vouchers sold per deal and lower take rate. The company’s approach to extended period deals and selective lowering of high quality deals to differentiate itself from competitors lead to the decline in deal take rates.

With increasing Internet penetration, the rise of social commerce and the expanding online travel market the deals business holds long-term growth potential. However, the low entry barrier pitches Travelzoo against a large number of existing competitors as well as potential new entrants in the market. Owing to further increase in competition, we expect the company’s average revenue per deal and take rate to decline in the future. The impact could be magnified if competition intensifies more than expected, spilling over the effects to the company’s top line.

Higher Operating Expenses To Drive Future Growth

The continued investments in sales force expansion, search marketing, and product development primarily related to the hotel booking platform led to a decline in operating margin from 26% in Q2 2012 to 19% in Q2 2013. However, the company made efforts to balance such investments by limiting subscriber marketing spend.

The company expects to incur about $1.2 million this quarter on development of the hotel booking platform, which represents incremental investment of $300,000 over Q2 2013. It also estimates higher operating expenses in the quarter due to continued ramp-up of headcount, increased marketing, and legal and professional fees that were not incurred as anticipated in Q2 2013.

Although such investments restrict growth in the short term, we believe these will drive long term growth for Travelzoo, by expanding subscriber base and attracting a greater number of publishers to its website. As Travelzoo plans to focus on growth and improved productivity, we estimate margins to stabilize in the long run.

We are in the process of updating our price estimate of $23 for Travelzoo.

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