Local Deals And Search Disorient Travelzoo’s Growth Trajectory

Travelzoo (NASDAQ:TZOO), a leading global Internet media company that provides information on travel, entertainment and local deals, witnessed a seasonally low Q3 2013. Revenues were up 5% y-o-y to $37.3 million, although lower than $41.3 million earned in Q2. The company incurred a net loss of $19 million in Q3 2013 compared to a net profit of $3.5 million in Q3 2012 due to a one-time charge of $22 million related to a legal settlement over unclaimed property audits. Non-GAAP net income, which excludes the impact of the one-time charge, stood at $3 million. ^[1]

Travel revenue rose by 16% y-o-y driven by growth in certain vacation packagers and Getaway hotel deals both in North America and Europe. This remarkable performance by the travel division was offset by declines in search and local deals revenue. Search revenue dropped by 10% due to reduced spending on traffic acquisition, while local deals revenue fell 8% owing to a reduced number of local deals vouchers sold per deal and lower take rates. ^[2] Travelzoo’s stock plunged 10% post its earnings announcement.

We believe Travelzoo’s search division will gain stability as the company frees up resources from its new hotel booking platform and diverts them towards the search business. We also believe that the company’s subscriber base will balloon as its audience engagement strategies generate repeat visits, referrals and higher conversion rates.

See our full analysis of Travelzoo

Search Business To Improve Post Hotel Booking Platform Roll-Out

Travelzoo’s new hotel booking platform, which is due to be launched in 2014, has been demanding heavy capital investments as it is still in the development phase. The company incurred $800,000 on the hotel platform in Q3 2013. No revenue is being realized from the hotel platform presently and the beta-testing phase is expected to start beginning of 2014, with incremental revenue realization to occur in the late second half of the year. ^[3]

The need to balance investments has forced the company to reduce spending on search marketing, resulting in lower search revenue. ^[3] We believe that search revenue could increase after the completion of the hotel platform roll-out as Travelzoo shifts its focus towards bolstering growth in the search business and increases its search marketing spend.

Audience Engagement Strategies To Help Enhance Subscriber Base

Given the nature of its products, Travelzoo has seen an increase in the audience accessing its services through mobile devices. Mobile now accounts for over 40% of its total traffic. The company’s mobile iPhone and Android apps crossed 2.2 million downloads in Q3 2013. It also saw a record number of visits on social media with approximately 1.8 million combined Facebook and Twitter fans at the end of the quarter. ^[4]

Seeing the current trends Travelzoo has increased its focus on building its mobile and social audiences. It is working to lift consumer engagement levels 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 build its own hotel booking platform as it will allow users to quickly and easily book hotels within Travelzoo’s websites and mobile products. ^[3] Travelzoo also updated its website last week to include subscriber localization, enhanced search function, Facebook comments, and user reviews and rating. This increased year-over-year subscriber activity on Travelzoo sites by 14%. ^[3]

We believe that such initiatives will help the company fuel audience growth, thereby boosting its top-line.

We are in the process of updating our $24 price estimate for Travelzoo based on the Q3 2013 results.

Click Here To Understand What Drives A Stock At Trefis

1. Travelzoo Reports Third Quarter 2013 Results, Travelzoo Investor Relations, Oct 17, 2013 [↩]
2. Third Quarter 2013 Performance and Growth Strategy Overview, Travelzoo Investor Relations, Oct 17, 2013 [↩]
3. Travelzoo’s CEO Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, Oct 17, 2013 [↩] [↩] [↩] [↩]
4. Third Quarter 2013 Performance and Growth Strategy Overview, Travelzoo Investor Relations, Oct 17, 2013 [↩]