Travelzoo Q4 ’14 Earnings Preview: Hotel Booking Platform Might Lend Some Positivity To The Otherwise Grim Performance

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Travelzoo (NASDAQ: TZOO), a leading global player in the internet media domain  with a subscriber base of approximately 27 million, will release its Q4 2014 earnings on January 22nd. The company experienced a 8% year-on-year decline in revenue to $111 million for the first nine months of 2014. This can be attributed to the weak performance of its Local Deals and Search divisions, which together account for about 44% of Travelzoo’s business. [1] 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 intense competition in this segment of the market. 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. [2]

To address these issues, the company is increasing investment and reinventing and re-positioning itself to better face changing market demands. Travelzoo management suggested the declining revenue trend would persist through the end of 2014, but expects growth to re-accelerate into the new year as the benefits of these initiatives pay off.

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. It is reducing its focus on the Search segment while still maintaining the division.

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Our price estimate of $21 for Travelzoo is at a significant premium to the current market price. We will update our valuation after the Q4 2014 earnings release.

See our full analysis of Travelzoo

Hotel Booking Platform Might Positively Impact Travelzoo’s Revenues in The Fourth Quarter

With the introduction of the hotel booking option on its websites in March 2014, the company has marked a shift from its existing business model. The hotel booking platform enables users to book hotels directly via Travelzoo’s website or through mobile products, thus also allowing suppliers to promote deals in a more flexible manner.  For example, loading a last minute rate for a hotel has become much easier compared to Travelzoo’s previous solution, which redirected users to the hotel’s website.

Also earlier, Travelzoo offered a platform to book discounted travel and entertainment deals. Hence, there was no flexibility to book according to the customers’ preferences. From the perspective of hotels, only off season deals could be published on the website (as peak-season deals are seldom discounted).

The hotel feature benefits all the three nodes in the ecosystem—the hotel, the user and Travelzoo. Here’s why the product is advantageous for each of them:

1.) The User: The platform benefits users in four ways. First, they can now book rooms in 500 plus hotels at any time of the year. Second, they can book full-price hotels with the service. Third, the platform has made booking via mobile much easier since the booking is completed on Travelzoo’s website itself, and users are not redirected to the hotel’s website. And fourth, users do not have to tackle the hassle of always buying vouchers. [3] [2]

2.) The Hotel: Many hotels could not participate on Travelzoo either because they were unable to operate under the voucher model or they did not want to run advertisements for discounted deals, but preferred a commission based model for transactions. With the launch of the platform, hotels have the option of selling full-price stays under the commission based model.

3.) Travelzoo: Prior to the introduction of the platform, Travelzoo was unable to take advantage of the peak season demand since it only offered off-season deals. Hotel prices are much higher during peak seasons than in off-seasons, and thus also generate higher commissions.

The Beta Versions Of Hotel Platform Depicting A Marked Improvement In Travelzoo’s Performance

The beta version of Travelzoo’s hotel booking platform is currently available to VIP members only. The company has introduced about 200,000 members to the hotel platform. 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.

Travelzoo derives more than 55% of its revenue from its Travel division. Travel revenues were almost flat in the first nine months at $76 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 the latter part of the year.

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. Additionally, the platform could help stabilize the decline in take rates that the company has been witnessing for the past several quarters.

Search And Local Deals Division Expected To Further Dampen Revenues

  • 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. There was around 26% year-on-year decline in Search revenue to $14 million for 9M FY14. The company has had a history of poor performance in the Search segment since 2012, experiencing an 11% decline in FY 2013.

However 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 were:  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.

  • Local Deals

The Local Deals division, which is mainly driven by a voucher format, is facing waning demand ($21 million revenue in 9M FY14 translating to ~22% year-on-year decline).

At the beginning of Q1 2014, 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.

Travelzoo has started repositioning itself in the Local Deals segment by increasing the flexibility of its products. 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 2014, the year-to-year number of “pull” or demand based purchases has risen as a percentage of sales.

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.

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Notes:
  1. Travelzoo Form 10-Q for the period ending September 30, 2014 []
  2. Travelzoo’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, April 2014 [] []
  3. First Quarter 2014 Performance and Growth Strategy Overview, Travelzoo Q1 2014 Presentation Slides, April 2014 []