Search And Local Deals Take Down Travelzoo’s Results Yet Again

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Travelzoo (NASDAQ:TZOO) posted another set of disappointing quarterly results with revenues down by 11% year on year to $36.9 million, in Q2 2014. The company’s top-line slumped owing to weakness in its Search and Local Deals businesses. Search revenue totaled $4.4 million and was down by 35% year on year as the company’s investments into its new hotel booking platform had to be balanced by reducing the search marketing spend. Search was also negatively impacted by low monetization on mobile devices. On the other hand, local deals revenue decreased 19% to $8 million due to a decline in the number of deal vouchers sold. According to Travelzoo’s management, the voucher format for deals is not suitable to many consumers as it is not a confirmed booking. [1]

We are in the process of updating our $21.33 price estimate for Travelzoo’s stock based on the Q2 2014 results.

See our full analysis of Travelzoo

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Search And Local Deals Business To Remain Suppressed In The Near-Term Despite Recent Efforts

During the second quarter, Travelzoo completed a strategic review of its search business. The company evaluated all options such as repositioning, terminating and merging its SuperSearch product with Fly.com. SuperSearch is a pay-per-click travel search tool, and Fly.com is a travel search engine that allows users to find the best prices on flights from different airlines and online travel agencies (OTAs). Travelzoo has decided to continue operating its search business as it is an important element of the overall strategy. Search helps the company to grow its subscriber base and provides important data related to travel trends. Citing these reasons Travelzoo has also integrated Fly.com with its own iOS app, with further integration expected to happen in the future. The company has also reduced its Google AdWords spend by $2 million to enhance profitability. [2]

At the beginning of the previous quarter, Travelzoo appointed Mike Stitt 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. We expect to see continued weakness in search and local deals in the next few quarters as the company’s efforts to revive the businesses will take time to ramp. Travelzoo is expecting Search revenues to decline by $2 million in Q3, compared to the year-ago quarter.

Travel Business To Improve As Hotel Booking Platform Grows In Scale

With the introduction of the hotel booking option on its websites this year in March, Travelzoo has marked a shift from its existing business model. The booking feature allows 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,  For example, 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 also helps 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. [3]

Travelzoo derives more than 65% of its revenue from its Travel division. Travel revenues were almost flat in Q2 at $24.5 million. Since revenue from the hotel booking platform is recognized when the stay occurs and not when the booking occurs, the platform will start contributing to revenues in this half of the year. The company had already increased its headcount ahead of the platform’s launch and will now start allocating more resources towards subscriber marketing. It will increase subscriber spend by $2 million per quarter for the next two quarters. [1]

Of the subscribers who are currently booking through the newly launched hotel feature, 85% had never purchased a Getaway deal on Travelzoo in the past year. The Getaways deals usually include a night or two at a hotel or resort within a two-hour drive or short flight from subscribers’ homes and include a fine dining experience or resort credit, plus other extras. Travelzoo’s robust growth in its hotel business so far has been primarily driven by the launch of its Getaway hotel offering in 2011. On the supply front, 50% of the hotels that are participating in the hotel feature did not work with Travelzoo in the past two years. [1]

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

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Notes:
  1. Second Quarter 2014 Performance and Growth Strategy Overview, Travelzoo Investor Relations website, July 2014 [] [] []
  2. Travelzoo’s (TZOO) CEO Christopher Loughlin on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, July 2014 []
  3. Travelzoo’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, April 2014 []