Travelzoo Q2 2015 Earnings Preview: Despite Year-On-Year Losses, Recovery Momentum Is Expected To Continue

Travelzoo (NASDAQ: TZOO) is slated to release its Q2 2015 earnings on July 16. All three of Travelzoo’s divisions: travel, search, and local deals, received a setback in 2014. The lack of traction on its new hotel booking platform (launched in Q1 2014), waning demands for its local deals, and reduced monetization of its search traffic were contributing factors to its poor performance. However, Q1 2015 started on a relatively positive note for the company. The hotel booking platform showed signs of healthier demand and monetization and its search traffic improved. We expect the growth recovery to continue in the second quarter though the company might still display year-on-year losses.

Travelzoo’s Bumpy Ride Over 2014 And Signs Of Recovery in Q1 2015

Travelzoo had been grappling with weak performance over the course of 2014. In order to face changing demands, the company repositioned itself with the launch of its hotel booking platform in Q1 2014. However, the traction has not been impressive. Travelzoo’s travel segment experienced a decline in net sales in 2014, for the first time in the company’s history, post the introduction of the booking platform. The offerings were not as attractive as those of its competitors. The company posted $142.1 million in total revenues in 2014, reflecting a 10% year-on-year decline, due to poor performance of its Local Deals, Search, and Getaway segments. ^[1]

Travelzoo’s performance improved in Q1 2015. Although its year-on-year losses continued, the company witnessed a 16% increase in its revenues over the previous quarter (Q4 2014). It posted $36.5 million in revenues, representing a 9% year-on-year decline. ^[2]

For the second quarter of 2015, the company expects the revenue declines to continue due to the product and service transitions and unfavorable FX impacts. The company will continue investing in product development and member acquisition. ^[3]

Our price estimate of $10.34 for Travelzoo is around a 15% discount to the current market price.

See our full analysis of Travelzoo

Travelzoo’s Hotel Booking Platform Is Expected To Display Growth

Travelzoo’s business model underwent a major transformation with the launch of its hotel booking platform. Travelzoo’s hotel booking platform is an upgraded version of its previous platform for discounted travel and entertainment deals. Hotels can sell full-priced stays in the new platform, under the commission based model. ^{[4] [5]} The hotel booking platform (now available in the beta version to its 200,000 selected U.S. based subscribers) enables users to book hotels directly via Travelzoo’s website, or through mobile platforms, allowing suppliers to promote deals in a more flexible manner.

After gauging the initial lukewarm responses towards the new platform, over the last few quarters, Travelzoo relaunched the hotel booking platform at the end of February 2015, with brand new content for six destinations including New York, Las Vegas, and Chicago. The current focus is on making the deals easy to find at any point in time and through any device. ^[3]

Travelzoo’s new platform puts it in direct competition with online travel giants such as Expedia (NASDAQ:EXPE) and Priceline (NASDAQ:PCLN). However Travelzoo maintains that its platform has some unique advantages which are going to lure customers and provide it with a competitive advantage. According to the management, the superior quality of offerings on the hotel platform will differentiate Travelzoo from the bigger players in the OTA space. Travelzoo will continue with the existing discounted deal format, but will also keep an eye on the customers’ preferred timelines. Also, earlier, Travelzoo’s 25 million users could access attractive deals only for places nearby to them. The new booking platform will enable Travelzoo’s entire subscriber base to access all the deals on Travelzoo’s website, almost simultaneously.

Increased Focus On The Search Segment

After several quarters of poor performance, Travelzoo’s Search division displayed better monetization of its Search traffic in Q1 2015.  There was around a 4% year-on-year growth in Search revenue to ~$5.1 million for the first quarter of 2015. In view of its recovery, the management has decided to slightly increase its spend on the Search products, i.e., SuperSearch and Fly.com. ^[3]

Local Deals Division Still Grappling With Changes  

Travelzoo’s Local Deals division’s lackluster performance had been attributed to the rigid voucher format for selling deals. The company is still on the lookout for a suitable alternative to the voucher format. The Local Deals division posted revenues of $5.7 million in Q1 2015, translating to around a 19% year-on-year decline.

Travelzoo is changing its deals’ selling model from a supply-based push strategy to a demand-based pull strategy. The March 2015 Local Deals performance has shown recovery after the removal of a few weak suppliers from the platform. ^[3]

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1. Travelzoo Reports Fourth Quarter 2014 Results, Travelzoo, January 2015 [↩]
2. First Quarter 2015 Performance and Growth Strategy Overview, Travelzoo Investor Relations, April 16, 2015 [↩]
3. Travelzoo’s Q1 2015 Earnings Call Transcript, Seeking Alpha, April 16, 2015 [↩] [↩] [↩] [↩]
4. First Quarter 2014 Performance and Growth Strategy Overview, Travelzoo Q1 2014 Presentation Slides, April 2014 [↩]
5. Travelzoo’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, April 2014 [↩]