Feeble Presence In Mobile Search Will Adversely Impact Travelzoo

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Travelzoo (NASDAQ:TZOO) is slated to release its earnings for the first quarter of 2014 on Thursday, April 17. A healthily growing travel business helped the company to pump its top-line up by 5% to $158.2 million in 2013. However, the company struggled with its search business through the year as it had to lower investments into the division in order to build a new hotel booking platform. Search revenue declined by over 10% to $24 million in 2013. [1]

Travelzoo is presently conducting a performance review of its SuperSearch product and has brought new executives on board to devise the future strategy for search. We expect to see continued weakness in search in Q1 as the company’s efforts to revive the business will take time to ramp. We also expect operating margins to remain under pressure due to continued investments in building the hotel platform. Travelzoo’s EBITDA margin fell by over 3 percentage points to 18.1% in 2013 owing to a $3.1 million investment in the platform. [2]

We will update our $24.41 price estimate for Travelzoo after the upcoming quarterly results are announced.

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See our complete analysis of Travelzoo’s stock here


Hotel Booking Platform Will Start Bringing In Revenues From This Year

The primary agenda behind building the new platform is to reduce the friction associated with hotel bookings. The platform will allow users to book quickly and easily within Travelzoo’s websites and mobile products, thus also allowing suppliers to promote deals in a more flexible manner; e.g. loading a last minute rate for a hotel will become much easier compared to Travelzoo’s current solution, which redirects users to the hotel’s website.

The hotel platform is presently in its beta testing phase with the roll out expected across all devices later this year. Since revenue is recognized when the stay occurs and not when the booking occurs, the platform will start generating revenue in the second half of 2014. The company has already increased its headcount ahead of the platform’s launch. During the earnings call, management conveyed that it will now start allocating more resources towards subscriber marketing. [2]

We believe that Travelzoo’s entry in hotel bookings is a good long term strategy, as it opens up an additional revenue opportunity for the company. In our view, Travelzoo’s growth will accelerate as the platform grows its scale by attracting more subscribers and advertisers. To learn more on how the hotel booking feature can drive Travelzoo’s growth, read our article: Travelzoo’s Hotel Booking Feature Can Help Drive Big Growth

Travelzoo Needs To Aggressively Target Mobile To Revive Search

Travelzoo’s search products include SuperSearch, a pay-per-click travel search tool, and Fly.com, a travel search engine that allows users to find the best prices on flights from different airlines and online travel agencies (OTAs). Fly.com completed the first full quarter of its mobile site in Q4 last year. It processed about 750,000 searches in its first quarter of business. However, it does not have any mobile app. This led the average number of monthly searches on Fly to decline from 3.5 million in 2012 to 3.3 million in 2013. The number of monthly searches on SuperSearch also plummeted from 5.1 million to 4.1 million contemporaneously since the brand has neither a mobile app nor a mobile site. [2]

SuperSearch and Fly also faced the brunt of rising traffic acquisition costs and the need to balance spending which forced Travelzoo to decrease investments into search. The company is considering whether to reposition, terminate or merge SuperSearch with Fly. It is also focusing on driving profitable growth, which could result in a revenue decline of about $1.5 million from SuperSearch in Q1 2014 compared to the year-ago period. Travelzoo has stated that the hotel platform will be its key focus area in 2014, and thus, we think that it may not significantly increase its investments on search to bolster growth. [2]

About 66% of Travelzoo’s revenues are generated in the U.S. Future growth in the U.S. search sector is expected to come from mobile. According to eMarketer, about 2% of the digital ad spending on search in 2010 occurred on mobile devices. This was expected to reach 22% last year, and eMarketer forecasts that the figure will cross the 50% mark by 2017. [3] In line with this trend, search engines are increasing their focus on mobile devices to attract traffic. We believe that Travelzoo needs to heavily invest in building mobile products and modernizing its search offerings. The company has $66 million in cash on its balance sheet with no debt. It could utilize the cash or raise money through the debt channel to invest into mobile search.

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Notes:
  1. Travelzoo Form 10-K 2013, www.sec.gov, February 2014 []
  2. Travelzoo’s CEO Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, January 2014 [] [] [] []
  3. Mobile Gains Greater Share of Search, Display Spending, eMarketer, August 2013 []