Travelzoo’s Q3’14 Earnings Preview: Growth Will Re-Accelerate In Fiscal 2015

Travelzoo (NASDAQ:TZOO), the global internet media player with a subscriber base of approximately 27 million, will release its Q3 2014 earnings on October 16. The company experienced a year-to-year decline in revenue in the first half of fiscal 2014  due to the weak performance of its Local Deals and Search divisions, which together account for about a third of the business. The Local Deals division, which is mainly driven by a voucher format, is facing waning demand due to the complex and inflexible process in place to book and redeem them. The Search division has been lagging behind due to intensified competitive pressure in this market place. In its Q4 2013 earnings call, the management attributed the resultant weakening in its market position to its delay in investing sufficient resources in the business. ^[1]

To address these issues, the company is increasing investment and reinventing and re-positioning itself to better face changing market demands. Travelzoo expects the declining revenue trend to persist in the second half of 2014 as well, but expects growth to re-accelerate by the beginning of next year as the benefits of these initiatives pay off.

Our price estimate of $21.39 for Travelzoo is at a significant premium to the current market price. We will update our valuation after the Q3 2014 earnings release.

See our full analysis of Travelzoo

Overhaul Of The Hotel Booking Platform To Help Expand User Experience & Forge New Hotel Partnerships

Travelzoo’s primary focus continues to be the enhancement of its hotel booking platform, a major contributor to the Travel segment of their business which accounts for around two-thirds of its total revenue.

Initially, Travelzoo offered a platform to book discounted travel and entertainment deals. Hence, there was no flexibility to book according to the customers’ preferences. Also, from the perspective of hotels, only off season deals could be published on the website (as peak-season deals are seldom discounted). Travelzoo has started addressing those impediments by releasing a beta version of a more flexible and evolved platform. This is initially available to 200,000 subscribers and will eventually be open to all. The following trends have been observed so far:

1. Full priced hotels are featured in the platform, which received a positive response both from the customers and hotels. Out of the 200,000 subscribers, almost 50% of hotel bookings were fully priced and about 50% of the bookings were at hotels new to the site (i.e., hotels that had not done business with Travelzoo in the last two years).
2. 84% of the Getaway voucher sales on this platform were made to first time purchasers.
3. The average hotel revenue per transaction shot up from a two year average of $13 to $54 under this beta version.
4. Commission-based transactions and peak season deals, which were not possible earlier, have been introduced, thus allowing hotels reluctant to use a voucher or advertisement format to partner with Travelzoo.
5. The management observed that the demand for the voucher format and Hotel Direct (which transfers the user to the hotel’s website for booking) are trending downwards. Hence, they plan on consolidating all the formats of booking hotels into one single platform in the future.

The test site reveals that the company has been able to feel the pulse of the changing market dynamics and have taken steps which might have a significant positive impact on the future earnings.

Travelzoo To Continue Investing In Search

Travelzoo’s Search division has performed poorly in the last few quarters on account of intense competition and the company’s delayed investment in the business. It witnessed a 11% year-on-year decline in revenue in fiscal 2013. Search plays an integral part in generating business for Travelzoo, primarily by:

• Generating a wider subscriber base
• Forecasting client requirements by analyzing the search trends and consequently, providing suitable products
• Driving revenue figures

Given the weak results of 2013, management reassessed the Search business and appointed David White  in Q1 2014 to revamp the business. Mr. White had held senior product positions at Yahoo. Under his guidance, Travelzoo plans to enhance the Search platform based on changing demands. Some initiatives taken by him are:  the integration of fly.com in Travelzoo’s iOS application  and ongoing research to create a flight search tool integrating fly.com and Supersearch. Though the company plans to continue its investment in the Search area, it intends to lower the spending compared to the past.

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1. Read the conference call transcript at Seeking Alpha. [↩]