Travelzoo (NASDAQ:TZOO) is set to release its results for the fourth quarter and full year 2013 Thursday, January 23. The Internet media company struggled with its search and local deals business through the year. However, increased focus on travel helped the company to register top line growth despite these headwinds. It posted total revenue of $37.3 million in Q3 2013, up by 5% compared to the same quarter in 2012. (Read: Local Deals And Search Disorient Travelzoo’s Growth Trajectory)
Due to a seasonally slower second half, Travelzoo’s management expects total revenue to be sequentially flat in Q4. Negatively impacted by declines in vouchers sold per deal and take rates, we estimate local deals revenue to be sequentially flat or lower quarter-on-quarter. On the other hand, we expect growth in travel revenue driven by certain vacation packagers, cruises and Getaway deals to offset a likely decline in search revenues caused by reduced spending on traffic acquisition.
Travelzoo is investing heavily in audience engagement and product development strategies to fuel revenue growth. Although these investments have weighed on the company’s EBITDA margins in the last few quarters, and will continue to do so in the quarters to come, we think that these investments are necessary to drive long term growth.
Focus On Audience Engagement And Product Development Will Attract Subscribers
The size of its subscriber base is one of the most important drivers for Travelzoo, as it derives the majority of its revenue from advertising. The company is working to lift consumer engagement levels by focusing on website development and product development that will simplify ease of use and create better visual presentations. This helped the company to end Q3 with 14% higher subscriber engagement levels. It added 700,000 subscribers in North America and Europe in the first three quarters of 2013, lifting its subscriber base to 23.2 million at the end of Q3. 
Travelzoo enhanced its website in early Q4 to include subscriber localization, enhanced search function, Facebook comments, and user reviews and rating. The management reported that these enhancements were driving improvements in subscriber engagement, number of searches, time on site and homepage signups.  In addition, the beta version of Travelzoo’s new hotel booking platform is expected to be rolled out in Q1. The platform will allow users to book hotels quickly and easily within Travelzoo’s websites and mobile products. We believe that the company’s focus on audience engagement will help it to fuel further growth in its subscriber base by generating repeat and referral visits by customers.
Investments Will Suppress Margins But Also Drive Top Line Growth
Investments in the sales force to support its local deals business, and building the new hotel booking platform, has required Travelzoo to loosen its pockets. In the first nine months of 2013 these investments weighed on the company’s EBITDA margins, which fell by 460 basis points year on year to 19%. The company has so far incurred $2.8 million on headcount and development costs related to the platform and it expects to incur another $1.1 million in Q4. Although this will take a toll on the company’s EBITDA margins, we think that such investments are necessary to drive long term growth. The hotel booking platform is still under development, and therefore, it is presently providing no significant revenue benefits to the company. We expect revenues to rise in the back half of 2014, once the platform goes live, thereby offering support to the margins.Notes:
- Third Quarter 2013 Performance and Growth Strategy Overview, Travelzoo Investor Relations, October 17, 2013 [↩]
- Travelzoo’s CEO Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, October 17, 2013 [↩]