Travelzoo’s Weak Performance Continues in Q3 2014, as Expected

As anticipated by the company, Travelzoo’s (NASDAQ:TZOO) top line continued to decline in Q3 2014. The global internet media player’s revenue fell by 10% year on year to $33.5 million, mainly due to the weak performing Search and Local Deals division.

The Search revenue for Q3 2014 was $4.4 million, which declined by 27% year on year. Travelzoo has been performing poorly in this segment since 2012, experiencing 11% decline in FY 2013. Taking into consideration the previous failed attempts to generate profitability, Travelzoo has started reducing marketing expense in this segment. However, Search does help in customer base expansion and gives an idea about the kind of deals users are searching for—hence, it is a necessary evil for the company.

The revenue for Local Deals stood at $6.5 million, which translates into a 19% year-on-year decline, one that was driven by a change in focus from selling voucher formats of pre-existing deals to offering more deals based on user demand. Travelzoo has started repositioning itself in this segment by increasing the flexibility of its products. Earlier, customers were forced to choose from a pre-existing set of deals offered at specific dates. This push-based strategy wasn’t reaping profits for the company, as there was a demand supply mismatch. As a result, there was a 3% year-on-year decline in FY 2013. In the last two quarters, the company  experienced losses due to this segment. The company is molding its local deals to better align with changing consumer needs, by offering user demand-based deals versus forcing them to choose from whatever is available. Towards this end, it is increasing the number of live deals on its platform and is also trying to find an alternative to the rigid voucher format of booking. Consequently in Q3, the year-to-year number of “pull” or demand based purchases has risen as a percentage of sales. At present, the lower demand for push-based deals will mask this growth rate, though future performance can improve  as pull-based deals become predominant.

Our price estimate of $21.39 for Travelzoo is at a significant premium to the current market price. We are in the process of updating our valuation for the company.

See our full analysis of Travelzoo

Currently, Travelzoo is in a transition phase with new product developments and strategy changes. The company is developing its new hotel booking website, repositioning itself from a discount offer dealer to selling packages based on client needs.  In so doing, it is building its user base through mobile applications and social media, as well  as reducing its focus while still maintaining the Search segment.

Expenses On Building Hotel Platform And Increasing Subscriber Base Impacts Short Term Profitability

Travelzoo’s major strategic initiative has been its hotel booking platform. This is a primary contributor to its Travel Segment, which accounts for two thirds of its revenue.  Travelzoo’s hotel booking platform aims to simplify the booking experience by allowing bookings through multiple mediums and by offering a greater number deals to suit the user’s chosen dates. The content is still being built which requires additional expense. The hotel booking website, introduced to a subset of subscribers, has increased the customer service cost.

Also, the company spent $1.8 million in Q3 2014 to expand its subscriber base, which hit its operating margin adversely. The subscriber base had a year-on-year growth of 4% in FY Q3 2014.

Travelzoo has charted a road map for long term profitability and it seems it is ready to take a hit in the short term performance to reach that stage gradually.

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