Local Deals & Getaway Platform Lift Travelzoo’s Earnings, Outlook

After a flat Q2 and a disappointing Q3 2012, the 4% sequential and 5% annual increase in Travelzoo’s (NASDAQ:TZOO) Q4 2012 earnings was a pleasant surprise. Amid the weak macro conditions and lower revenue from Local Deals and Supersearch, Travelzoo witnessed a slowdown in both North America and Europe in Q3 2012. While its search revenue continued declining in Q4 2012, higher revenue from travel and Local Deals contributed to an y-o-y growth in both North America and Europe.

Though there are certain factors such as the challenging economic situation, airline consolidation, lower spending by online booking engines, increasing operating expenses etc., which could dampen Travelzoo’s short term growth, we maintain a positive outlook for its long-term growth prospects.

With growing strength in its hotel business driven by Getaway hotel offering, robust growth in mobile traffic and social media integration as well as potential growth in its Local Deals business, we believe that Travelzoo is in a good position to leverage future growth in the online travel industry. Additionally, the company has a strong financial position with a positive cash flow, increasing cash and no debt.

Travelzoo’s stock price jumped by more than 20% after its earnings release and its current market price is almost in line with our price estimate of near $24 for the company.

See our full analysis of Travelzoo

High Quality Deals & Sales Force Ramp-Up To Drive Local Deals Business

Having suffered a setback in Q3 2012, Travelzoo’s Local Deals business witnessed steady growth during Q4 2012. Seasonal factors and continued expansion in its sales force led to a 4% and 20% sequential increase in Local Deals revenue from North America and Europe, respectively. However, a growing number of published deals last quarter was offset by a decline in average vouchers sold per deal.

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. Travelzoo’s existing hotel relationships and growing subscriber base for its other products, like the Top 20 Newsletter, could give the company an edge over its competitors. In its Q4 2012 earnings call transcript, Travel mentioned that over a million people have bought Local Deals from them so far.

We feel an increasing investment in building a strong sales force and its focus on high quality deals could help drive future growth in Travelzoo’s Local Deals Business. While its strategy to only feature high-quality merchants was one of the contributing factors for lower deals revenue in Q3 2012, Travelzoo believes that quality experience leads to referral behavior that in turn helps its brand thrive over the long-term.

Scaling Growth In The Getaway Platform

While the lower revenue from airline bookings and packages have slowed growth, the company has seen 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 them with an opportunity to stimulate incremental sales. Travelzoo registered 50% growth in business from the Getaway platform and we expect the revenues to continue growing in the future as well.

Currently, Travelzoo does not offer direct online bookings for a specific date. However, it aims to roll-out its new hotel booking platform that will enable its users to book hotels directly via its website or through mobile products. Additionally, with rampant increase in its sales force, the company intends to ramp up the number of hotels and deals in its portfolio in the future.

We feel that the above developments will further accelerate demand for hotel bookings, which will continue to significantly contribute to Travelzoo’s revenue growth.

Rising Operating Expenses Will Fuel Future Growth

Travelzoo saw a significant decline in its EBITDA margin in 2011 due to increasing advertising spend on building brand awareness and higher general and administrative expenses incurred on account of headcount growth to scale international expansion. Even in Q4 2012, the company’s bottom-line suffered due to increasing investments in headcount and subscriber acquisition as well as higher marketing expenses.

The company anticipates high operating expenses this quarter as well due to continued ramp up of headcount, increased marketing, legal and professional fees and development costs for building its hotel booking platform.

While the increase in investments might be detrimental for short-term growth, we expect it to play a crucial role to spur long-term top-line growth. Going forward, we expect the expenses to reduce, and as Travelzoo plans to focus on growth and improved productivity, we estimate margins to stabilize in the long run.

We are in the process of updating our current price estimate of $23.80 for Travelzo0

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