Travelzoo (NASDAQ:TZOO) is a leading global Internet media company. With over 24 million subscribers, it provides travel and entertainment companies, as well as small businesses the ability to efficiently reach out to consumers to sell their services and products. Apart from the Travelzoo websites, the company has several publications and newsletters across the globe. In addition, Travelzoo operates Fly.com, a travel search engine and a social commerce business (Local Deals), which provides its subscribers with high quality deals for restaurants, spas, shows, concert events. etc.
Touching a high of $31 at the start of the year, Travelzoo has been treading a downward path since then. Apart from the adverse macro conditions, we believe that certain intrinsic factors which have slowed down Travelzoo’s growth this year, are also responsible for the negative sentiment among investors.
Here we provide a quick snapshot of how Travelzoo makes money, the important segments that contribute to its business and the key factors driving its valuation.
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What are the key markets for Travelzoo? How does the company make money?
Travelzoo’s services are available in North America, Europe and Asia Pacific. In Asia Pacific, its business is operated by Travelzoo (Asia) Ltd. and Travelzoo Japan K.K., under a license agreement with Travelzoo Inc. Travelzoo does not have any significant ongoing involvement with the operations of the Asia Pacific segment since its sale to Azzurro Capital Inc. in 2009. Thus, Travelzoo now has only two operating segments – North America & Europe. More than 75% of its business is concentrated in North America and the remaining in Europe. The company is witnessing a higher growth rate in Europe as the North America business nears saturation.
Travelzoo earns majority of its revenue from advertising, primarily listing fees paid by travel companies, entertainment companies and local businesses to advertise their offers. The company also earns revenue from merchant agreements for Local Deals and Getaway advertisers. In addition, airlines and travel agencies pay Travelzoo for showing them in the search results on Fly.com and Supersearch.com.
What Are The Important Segments That Contribute To Its Growth?
Historically, Travelzoo’s revenue has increased at a rapid pace. The company made close to $150 million in 2011 and earned 16% operating profits on the same, which is constant across its business segments. Advertising accounts for 68% of Travelzoo’s revenues whereas the local deals and search business segments contribute around 22% and 10% respectively.
Last quarter, a decrease in Travelzoo’s search and Local Deals business led to a significant decline in its revenues, and the aggressive investment into team expansion and product portfolio enhancement, put a downward pressure on its operating margins. However, we believe that with growing strength in its hotel business, driven by Getaway hotel offering, a robust increase in mobile traffic and social media integration, Travelzoo is in a good position to leverage future growth in the online travel industry.
Growing strength in the hotel business
While the reduced revenue from airline bookings and packages have slowed down growth, the company has witnessed robust growth in its hotel business, primarily driven by Getaway hotel offering. Getaways, which was launched in 2011, is a voucher model which is gaining popularity among medium and small size hotels as it provides then with an opportunity to stimulate incremental sales.
Currently, Travelzoo does not offer direct online bookings for a specific date. However, it is in the process of opening up a hotel booking platform and is working towards providing its users the ability to book hotels directly via its website through mobile products. Additionally, the company intends to ramp up its hotel sales force to capture the growing demand for Getaways.
We feel that the above developments will further accelerate demand for hotel bookings, which will continue to significantly contribute to Travelzoo’s revenue growth.
Increase in searches via fly.com
Travelzoo’s search division includes revenues from both Fly.com, a travel search engine, and Supersearch, a pay-per-click travel search tool. While the company has registered an increase in searches via Fly.com, the number of searches on Supersearch has declined over the years, as Travelzoo diverts its marketing spend away from Supersearch and towards Fly.com.
Google’s integration of hotel search products on to their main search results page this year and Travelzoo’s focus to bring Supersearch Europe to profitability, led to a decline in traffic driven to Fly.com. The company claims that it needs a strategic review of its Supersearch product to stabilize the decline in number of searches.
While we forecast a continuous decline in searches via Supersearch, we estimate the searches on Fly.com to register y-o-y growth for the rest of our review period. We feel that the launch of hotel search will power search volumes growth, and the positive synergy with its core travel business will augur well for traffic at Fly.com.
Current investments to drive future growth
Aiming to accelerate its audience growth, Travelzoo has been aggressively investing in expanding its sales force, enhancing its product offerings and improvising the content and deals offered on its websites and newsletters. The company saw a significant decline in EBITDA margin in 2011 due to increasing advertising spend on building brand awareness, and higher expenses incurred on account of headcount growth to scale international expansion.
While the high expense base combined with lower top line growth could slow down Travelzoo’s growth this year, we believe that the same would accelerate growth once the investments start paying off. The company intends to pull back certain expenses in line with any potential decline in revenues in the coming quarters, but remains determined to continue innovating to stay ahead of competitors.
We forecast the EBITDA margins to reach close to the historical level by the end of our forecast period.
Our price estimate for Travelzo0 to $23.80 is at a premium of over 30% to the current market price.