Travelzoo Earnings: Looking For Growth In Local Deals And Mobile Traffic

Despite macroeconomic headwinds and a seasonally slow quarter, Travelzoo Inc. (NASDAQ:TZOO) posted a marginal sequential increase and a 5% y-o-y increase in its Q2 2012 revenue. The Internet media company continued the growth momentum in its North America business and marked its sixth consecutive year of profitability in Europe.

Travelzoo is expected to announce its Q3 2012 earnings on October 25, 2012. While increasing operational efficiencies amid declining profit margins remain a major concern for the company, we believe that scaling products such as Local Deals and Getaways as well as focusing on building a mobile foundation could enable Travelzoo to post another successful quarter this year.

Below we list certain factors to watch for in the Q3 2012 earnings release.

See our full analysis of Travelzoo

Pressure on Profit Margins

We believe the short-term growth opportunity for the company might be impacted as some of its competitors continue to operate below cost, in turn incurring significant losses. Though we believe this trend is not sustainable in the long term, it might have a negative short-term impact on profit margins for the industry as a whole.

Competitive pressures on costs have already shown a declining trend for advertising revenue per subscriber. Travelzoo started working on cost-cutting measures early this year and has been able to reduce its operational expenses as a percentage of revenues. Going forward, Travelzoo plans to focus on growth and improved productivity, which we believe will stabilize margins in the long run.

Scaling Local Deals & Getaways

Local Deals, launched in 2010, provides subscribers with high quality deals for restaurant, spa, activity, show or concert events. Travelzoo claims to differentiates itself from group-buying sites like Groupon, Living Social and AOL’s Wow.com by leveraging its existing hotel relationships and growing subscriber base for its other products like the Top 20 Newsletter.

Armed with strong management and a stable sales force division, Travelzoo deals reached 125 markets, with an approximate average deal size of 25,000 in the second quarter. In addition, the company saw greater success in distributing Local deals and Getaways on other websites such as The Los Angeles Times, Lonely Planet and The New York Times via the Travelzoo network.

We estimate Local Deals to contribute close to 20% to Travelzoo’s valuation. Travelzoo has been focusing on extending its reach to additional U.S., Canadian and European cities while aiming to increase deal frequency and revenue per market. We estimate the number of deals per market to substantially increase by the end of our forecast period.

Growth In Mobile Traffic

Travelzoo has registered a significant increase in its mobile traffic, from 10% (of the total traffic) a year ago to the current level of 25%. Its mobile download count almost doubled to 1 million, with approximately 5,000 people a day downloading the Travelzoo application.

Alternate platforms such as smartphones and tablets have registered significant growth over the past few years, which is expected to continue at a rapid pace in the years ahead. Targeting the mobile travel space, Travelzoo’s mobile platform across iPhones, Android and others, is now live in all countries.

Travelzoo remains committed to ramping up investment in audience growth, across email, mobile and social user bases. It currently boasts of having 22.1 million subscribers. With a focus to stay abreast of changing consumer trends, we believe that the company is capable of expanding its user base in the future.

Our current price estimate of $26.36 for Travelzoo is at a premium of over 10% to the current market price.

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