Travelzoo’s Disappointing Performance Continues Due To Lack Of Traction And Increased Investments

Travelzoo (NASDAQ: TZOO), the global internet media player, released its fourth quarter results on January 22nd. The company posted $31.5 million in revenues for the fourth quarter of 2014, representing a 16% year-on-year decline, due to poor performance of its Local Deals, Search and Getaway segments. For the full year 2014, Travelzoo’s revenue witnessed a 10% year-on-year decline to $142.1 million. ^[1]

The Search revenue for Q4 2014 was $3.6 million, which declined by 20% 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 $7 million for Q4 2014, which translates into a 23% 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. The company is molding its local deals to better align with changing consumer needs, by offering user demand-based deals rather than forcing customers to choose from whatever is available. Consequently in Q4, 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.

The declining traction for Getaways, migration of more deals from the Getaway model to the new hotel booking platform, and the delayed revenue recognition from the hotel booking platform, have all dampened revenues from the Travel Segment as well. In Q4 2014, the revenues from Travel stood at $20.9 million, reflecting 12% year-on-year decline.

Travelzoo expects the trend of year-on-year revenue decline to continue in the next quarter, due to increased investment in product development, professional  and marketing related costs. Over the next few quarters, Travelzoo intends to increase is quarterly member acquisition and other marketing spending to the tune of $2 million to $3 million, year on year. ^[2]

Our price estimate of $21 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

Hotel Booking Platform Increases Travelzoo’s Flexibility & Service Offerings, But Greater Differentiation Is Imperative

Travelzoo introduced the hotel booking option on its websites in Q1 2014. Travelzoo brought about a transformation in its previous business model with this option. 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). 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] [4]}

On the flip side, the hotel booking feature is eroding the very aspect by which Travelzoo was differentiated from its peers in the online travel space. The discounted deals were the unique selling point for Travelzoo, which to some extent is being overshadowed by the recent developments on hotel booking. The hotel booking feature is similar to what other online travel agencies (OTAs) such as Priceline (NASDAQ: PCLN) or Expedia (NASDAQ: EXPE) offer. Given the stature and market share of these companies, it would be very difficult for Travelzoo to make the existing customers for these behemoths  switch loyalties. ^[2]

Hence, how is Travelzoo differentiating itself from competition and what are its unique selling points?

• According to Travelzoo’s management, the bigger OTAs are more concerned about the volumes of transactions. But Travelzoo gives a lot of emphasis on its members’ satisfaction. Hence the quality of offering would differentiate them from competition.
• Travelzoo aims to provide the best possible options to its members, during the dates they choosen. For example, if Travelzoo offers a $199 room in a very busy period in New York, when the ongoing rate is $400 for a room elsewhere, then it still counts as a good deal. Hence, Travelzoo aims to continue with the existing discounted deal format but it will also keep an eye on the customers’ preferred timelines.
• Earlier, Travelzoo’s 27 million users could easily access attractive deals only for places nearby to them. For example: It was a time consuming and cumbersome process for a user in the U.S. to access a deal in Paris. However, the new booking platform will enable Travelzoo’s entire subscriber base to access all the deals on Travelzoo’s website, almost simultaneously.

Currently, the hotel booking platform (available in the beta version to selected members) has failed to generate enough traction, due to a limited inventory of hotels available. The offerings weren’t attractive enough when compared to its competitors, hence Travelzoo’s management intends to relaunch the platform and aims to provide better content in the first quarter of 2015. ^[2]

Future Growth Strategies:

• Emphasis On Big Data:

In its earnings call, Travelzoo’s management emphasized about the importance of big data and advertisement  in building their business. Travelzoo is one of the largest travel brands on Facebook and Twitter, rubbing shoulders with the likes of Expedia and Groupon (NASDAQ:GRPN). Travelzoo is keen on channelizing the data available via social media websites to provide more customized products. It intends to leverage the data to learn more about users’ behavioral pattern and hence offer products which are better fit for its users.

• Acquisition Of Value Generating Members

The company is focusing on acquiring the right set of users, i.e. people who will genuinely help in revenue generation. Hence it is targeting its products to a particular audience and is not aiming at bulk acquisition of subscribers.

Earlier, member acquisition was limited to online advertisements. Now this has expanded to offline channels as well. The customers’ feedback is extremely important in tailoring the deals. In addition, there is the Travelzoo Network which publishes deals to partner sites such as the LA Times, Yahoo Travel, and Frommers.

The Weak Performance Of The Search And Local Deals Division Continues

• 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 25% year-on-year decline in Search revenue to ~$18 million for 2014. ^{[5] [1]}

Given the weak results of 2013 (11% decline), 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. Earlier, the Search segment was not managed optimally to generate maximum profitability. Though marketing would create the buzz for users to come and explore SuperSearch or Fly.com, that didn’t generate enough value per customer or repeat customers. Hence Search related spending has been on a decline, which is dampening the revenues for the division in the short term.

• Local Deals

The Local Deals division, which is mainly driven by a voucher format, is facing waning demand ($22 million revenue in 2014 translating to ~22% year-on-year decline). ^{[5] [1]}

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 now helps it in developing new deal formats that better suit customers. Currently, the number of live deals  placed on websites and applications has increased, along with the ease of searching for the deals. The company is still on the lookout for a suitable alternative for the rigid voucher format.

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1. Travelzoo Reports Fourth Quarter 2014 Results , Travelzoo, January 2015 [↩] [↩] [↩]
2. Travelzoo’s Fourth Quarter Earnings Transcript, Seeking Alpha, January 2015 [↩] [↩] [↩]
3. First Quarter 2014 Performance and Growth Strategy Overview, Travelzoo Q1 2014 Presentation Slides, April 2014 [↩]
4. Travelzoo’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, April 2014 [↩]
5. Travelzoo Form 10-Q for the period ending September 30, 2014 [↩] [↩]