Travelzoo (NASDAQ:TZOO) posted $37.5 million in revenues for the fourth quarter of 2013, representing year-on-year growth of 1% after a seasonally low Q3. This neutral growth masks the mixed results of its businesses. Travel revenue increased 11% driven by increased advertising by vacation packagers and growing Getaway deals revenue in both of the operating segments (North America and Europe). This growth was offset primarily by a decline of 26% in search revenue, which resulted from reduced spend on traffic acquisition and user migration to mobile devices. Local deals revenue registered a 3% decrease due to decline in deal take rates. 
The global Internet media company is building a new platform to reduce the friction associated with hotel bookings. The platform will allow users to make bookings quickly and easily within Travelzoo’s websites and mobile products. The company’s current solution redirects users to the hotel’s website. We estimate that despite continued investments in developing its hotel booking platform, Travelzoo’s operating margin increased by 70 basis points year-on-year to 15.1%. This up-move was fueled by reduced spend on search marketing and subscriber acquisition to balance goals with investment needs.
Even though Travelzoo repurchased $7.8 million of its common stock in Q4, it ended the year with $66 million in cash and no debt on its balance sheet. It also announced a repurchase program of 500,000 additional shares that will be funded with available cash.
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We are in the process of updating our $23.48 price estimate for Travelzoo based on the recently announced results.
Subscriber Base Grows But Slowly, Increased Investments Expected In Near-term To Re-accelerate Growth
Focusing on audience engagement strategies and product development helped Travelzoo to boost its user base from 22.5 million in 2012 to 23.3 million at the end of 2013. The company benefited from its enhanced website that now includes subscriber localization, enhanced search function, Facebook comments, and user reviews and rating. However, it held back on its subscriber acquisition investment through the year to be able to invest aggressively in the upcoming hotel booking platform. Consequently, its subscriber base grew at the slowest pace in five years.
The hotel platform is presently in its beta testing phase, with the roll out expected across all devices later this year. Travelzoo is through with most of the development process and has already increased its headcount ahead of the platform’s launch. During the earnings call, management conveyed that it will now start allocating more investments towards subscriber marketing. 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. We believe that the company can re-accelerate growth in its subscriber base with its focus on subscriber acquisition strategies, audience engagement and product development.
Travelzoo To Conduct A Performance Review Of Its Search Business
Revenues from SuperSearch and Fly.com, Travelzoo’s search products, witnessed a 26% year-on-year decline in Q4 and stood at $4.6 million. Search revenues have been on a decline since 2011 due to stiff competition in the search market for traffic acquisition and consumers increasingly shifting to mobile search. SuperSearch is not present on mobile. On the other hand, Fly.com is present on mobile, but its monetization on mobile devices is lower than for desktops. 
Travelzoo’s management stated that while its competitors have invested heavily in innovation and adding search functionalities, the company has not. It is initiating a performance review of SuperSearch to evaluate all options including repositioning it, terminating it and merging it with Fly.com. Additionally, it has brought two new executives on board to build out a strategy for the search business. Notes:
- Fourth Quarter 2013 Performance and Growth Strategy Overview, Travelzoo Investor Relations Website, January 24, 2014 [↩] [↩]
- Travelzoo’s CEO Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, January 24, 2014 [↩]