Travelzoo Posts Disappointing Results On Search And Local Headwinds

Travelzoo’s (NASDAQ:TZOO) stock plunged nearly 10% on its disappointing first quarter results that were released Thursday, April 17. The company’s revenue decreased 5% over the year-ago period owing to a decline in search and local deals revenue. Search revenues slumped by over 25% to $4.8 million as the company’s investments into its new hotel booking platform had to be balanced by reducing the search marketing spend. On the other hand, local deals revenue decreased 21% to $6.9 million due to a decline in the number of deal vouchers sold. ^[1]

According to Travelzoo’s management, the voucher format is not suitable to many consumers as it is not a confirmed booking. At the beginning of the current quarter, Mike Stitt was appointed as the new president of Travelzoo Local in North America. Mr. Stitt helped Travelzoo launch local deals in 2010 and will now help it in developing new deal formats that better suit customers. ^[2]

A 6% year-on-year growth in travel-related revenue helped Travelzoo in partly absorbing the impact of lower Q1 search and local revenue. Travel generates more than 70% of the company’s sales. The growth in travel revenue, although positive, was lower than the double-digit growth achieved in each of the quarters last year. This can be attributed to lower Getaway sales in North America on account of a severe winter and reduced spending by online booking engines and international airlines. ^[2]

Based on the Q1 results, we have revised our price estimate for Travelzoo’s stock downward by 13% to $21.33. The new estimate marks our valuation at a premium of about 20% to the stock’s market price.

See our complete analysis of Travelzoo here

Hotel Business To Benefit From The Launch Of New Booking Feature

Travelzoo’s much anticipated hotel booking platform was finally launched for beta-testing in March. The company had been developing the platform since Q3 2012 with the aim of reducing the friction associated with 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 feature will also help Travelzoo to take advantage of peak season demand. Hotel room rates are higher during peak seasons and Travelzoo only offered off-peak season deals before the platform was launched. ^[2]

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 had already increased its headcount ahead of the platform’s launch and will now start allocating more resources towards subscriber marketing. ^[3] 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.

Investments in building the platform will negatively impact the company’s margins in the short term. Travelzoo’s EBITDA margins fell by over 3% to 18.1% in 2013. It spent $800,000 on the platform in Q1 2014 and expects to incur incremental costs to the tune of $1,100,000 in Q2. We believe these expenditures restrict the scope for margin expansion. ^[1] We have decreased our forecast for Travelzoo’s 2014 and 2015 EBITDA margins by 1% and 1.5% respectively, which drove a 10% downward revision in our price estimate for the company’s stock.

Search Will Continue To Be Impacted By Low Mobile Monetization And Marketing Spend

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. ^[4]

SuperSearch and Fly also suffered because the need to balance spending forced Travelzoo to decrease investments into search marketing. The company is currently focusing on driving profitable growth, which resulted in a revenue decline of about $1.5 million from SuperSearch in Q1. The company expects to witness a similar impact in Q2. It has stated that the hotel platform will be its key focus area in 2014, and therefore we think that it may not significantly invest in search marketing and building mobile search products to bolster growth. ^[3]

We have reduced our estimate for the number of search queries on SuperSearch and Fly, and also the average revenue per thousand searches for 2014. This translated into a 15% annual decline in search revenue. We expect growth to pick up next year as the expenditure on the hotel platform reduces and more financial resources are diverted towards search.

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1. First Quarter 2014 Performance and Growth Strategy Overview, Travelzoo Investor Relations, April 17, 2014 [↩] [↩]
2. Travelzoo’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, April 18, 2014 [↩] [↩] [↩]
3. Travelzoo’s CEO Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, January 23, 2014 [↩] [↩]
4. Travelzoo Form 10-K, www.sec.gov, 2013 [↩]