Factors That Led To A 46% Decline In Our Valuation Of Travelzoo

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We recently reduced our price estimate for the global internet media player, Travelzoo (NASDAQ: TZOO) from $21 to $11.42. Travelzoo released its Q4 2014 results on January 22nd, reporting a 16% decline in revenue. (Read our Q4 2014 earnings article) For full year 2014, the company’s top line declined to $142 million, 10.2% lower than 2013. Travelzoo has seen its revenue base decline continously over the past few quarters, on account of its increased investment in the new hotel booking platform and changed selling format of its Local Deals business.

Travelzoo expected its investments in the hotel platform to show some positive impact towards the end of 2014 and beginning of 2015. However, after the fourth quarter earnings results, it seems that the company still needs a long way to go before it sees any signs of profitability. Our revised forecast for the company’s EBITDA margin is the main reason behind the decline in our valuation. The company is yet to reap any meaningful return on the huge investments undertaken in the last few quarters.

Due to a surge in its operating expenses, Travelzoo’s EBITDA margin for 2014 declined to 12.3%, as compared to 18.1% in 2013. We expect Travelzoo’s EBITDA margin to increase over our forecast period, as investment levels come down in the next few years, to reach around 15% by the end of our forecast period. This margin would still be well below the 2013 levels of 18%.

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The main reasons for Travelzoo’s margin contraction are:

  • Hotel booking platform not generating the expected traction. In Q4 2014, the travel revenues declined for the first time in the company’s history.
  • Declining revenues from Local Deals due to the change in the voucher format and changing the business model from a “push” to “pull” based one.
  • Poor performance by the Search Segment which was exacerbated by reduced marketing spending on the business.

See our full analysis of Travelzoo

Travelzoo’s EBITDA Margins Declined To 12.3% In 2014:  All The Segments Incurred Losses In 2014

In our old model we made a forecast that Travelzoo’s 2014 adjusted EBITDA would be around $29 million. However, the actual figure came in much lower at around $18 million. Consequently, we have revised our forecast for this driver and now expect EBITDA margin to reach 14.5% by the end of our forecast period. In our old model we expected EBITDA margin to increase to 22.4%. The change led to around 35% decline in our valuation for the company. The remaining 10% decline came from change in forecast primarily for the number of subscribers, average revenue per thousand searches, the number of markets covered and the other updates for 2014.

The company’s adjusted EBITDA margin (adjusted EBIDTA margin is adjusted EBITDA/Revenue, where, adjusted EBITDA = Income from Operations + Stock-based Compensation + Depreciation & Amortization) for 2014 stands at 12.3% as against 18.1% in 2013. The reasons for the decline are:

  • In Q4 2014, along with the losses in its Search and Local segments, Travelzoo faced losses  in its Travel segment as well. This was quite a blow to the company, given the fact that it was banking on the new hotel platform to generate profitability for the Travel segment, which had been foregone due to heavy investments in the hotel segment. 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 provide better content in the first quarter of 2015. [1]
  • 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. In 2014, the revenues from Travel stood at $96.5 million, reflecting a 2% year-on-year decline.
  • The Search revenue for 2014 was $17.3 million, which declined by 38.9% year on year. Travelzoo has been performing poorly in this segment since 2012, experiencing an 11% decline in FY 2013.
  • The revenue for Local Deals stood at $28.3 million for  2014, which translates into a 27% 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.
  • Travelzoo expects the trend of year-on-year revenue declines to continue in the next quarter.  In addition it plans increased investment in product development, professional  and marketing related costs. Over the next few quarters, Travelzoo intends to increase its quarterly member acquisition and other marketing spending to the tune of $2 million to $3 million, on year over year basis. [1]

With the increased investment its pipeline and no significant return on those investments still in sight, we believe Travelzoo’s recent downhill performance trend is here to stay for a while.

Travelzoo’s Hotel Booking Platform Still Not Witnessing Expected Growth

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 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. [2] [3]

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. [1]

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.  Accordingly, Travelzoo’s management intends to relaunch the platform and provide better content in the first quarter of 2015. [1]

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Notes:
  1. Travelzoo’s Fourth Quarter Earnings Transcript, Seeking Alpha, January 2015 [] [] [] []
  2. First Quarter 2014 Performance and Growth Strategy Overview, Travelzoo Q1 2014 Presentation Slides, April 2014 []
  3. Travelzoo’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, April 2014 []