Travelzoo Earnings Preview: EBITDA Margin Headwinds To Continue This Quarter But Provide Long Term Benefits

by Trefis Team
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Leading Internet travel media company, Travelzoo (NASDAQ:TZOO) is set to release its Q3 2013 results on Thursday, October 17. The company posted 5% annual growth in its Q2 2013 revenues ($41.3 million), on the back of higher spending by vacation packagers and cruisers, and continued growth in Getaway voucher sales for hotels, both in North America and Europe. On the other hand, EBITDA margins were negatively impacted due to investments on subscriber marketing, sales force expansion and new product development.

Travelzoo expects to register sequentially slower growth in Q3 2013 revenues due to seasonality. Although the company intended to continue its investments in Q3 2013 that would impact EBITDA margins, we believe that such investments are important to drive future growth in its business. With focus on strengthening the hotel business, and mobile and social integration, Travelzoo is in a good position to leverage future growth in the online travel industry. The company has a strong financial position with a positive cash flow, increasing cash and no debt, which reiterates our belief in its long term growth potential.

Our price estimate of $24 for Travelzoo marks our valuation at a discount of about 10% to the current market price.

See our full analysis of Travelzoo

Focus on Audience Engagement Strategies To Enhance Subscriber Base

Travelzoo has seen an increase in the audience accessing its services through mobile devices. The company registered a significant increase in mobile traffic, which grew to 40% (of the total traffic) in Q2 2013, from 25% in the same quarter last year; downloads for its iPhone and Android apps experienced about 100% y-o-y growth, reaching 2 million. Travelzoo also saw a record number of visits on social media with approximately 1.5 million combined Facebook fans and Twitter followers at the end of the quarter.

Seeing the current trends in mobile and social media sphere, Travelzoo has decided to shift its mode of communication with subscribers from e-mail only to a balanced approach across mobile, social media and e-mail, in order to lift consumer engagement levels. It plans to achieve this by focusing on product development that will simplify ease of use and create better visual presentations. This was the primary motive behind the decision to launch its new hotel booking platform, as it will allow users to quickly and easily book hotels within Travelzoo’s websites and mobile products. The company also remains committed to driving audience growth and engagement across the social platform to build its global brand. We feel this will help increase the subscriber base as users get to access Travelzoo’s products via different channels.

High Industry Competition To Impact Local Deals Business

Travelzoo estimates sequentially lower local deals revenue in Q3 2013 due to seasonality issues. The company has been experiencing a declining trend in average vouchers sold per deal. The take rate for the company’s deals also decreased in Q2 2013, due to its approach of extending deal periods and selective lowering of high quality deals to differentiate itself from competitors.

With increasing Internet penetration, the rise of social commerce and the expanding online travel market, the deals business holds long term growth potential. However, the low entry barriers in the industry pitch Travelzoo against a large number of existing competitors as well as potential new entrants in the market. Owing to further increase in competition, we expect the company’s average vouchers sold per deal and take rate to decline in the future.

Short Term EBITDA Margin Headwinds To Provide Benefits In The Long Run

Rising competition has compelled Travelzoo to increase its investments on subscriber marketing, sales force expansion, new product development, social media and mobile integration, in order to retain and add new subscribers. These investments have impacted the company’s EBITDA margins in the recent quarters. At just about 19% for the first half of the year, its EBITDA margin was significantly low.

Travelzoo expects to incur $1.2 million in Q3 2013, on the development of its new hotel booking platform that it intends to launch later this year. The company estimates sales and marketing costs to increase by $500,000 compared to Q2 2013 due to investments in audience. It also estimates higher operating expenses due to continued ramp-up of headcount, and legal and professional fees that were not incurred as anticipated in Q2 2013.

Although such investments restrict growth in the short term, we believe these will drive long term growth for Travelzoo, by expanding subscriber base and attracting a greater number of publishers to its website. Going forward, we expect lower expenses, and as Travelzoo plans to focus on growth and improved productivity, we estimate margins to stabilize in the long run.

We will update our price estimate of $24 for Travelzo0 after the Q3 2013 earnings release.

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