Travelzoo Inc. (TZOO)

Q2 2010 Earnings Call

July 22, 2010 11:00 am ET

Executives

Chris Loughlin - CEO

Wayne Lee - CFO

Analysts

Ed Woo - Wedbush Morgan Securities

John Lewis - Osmium Partners

Noah Steinberg - G2 Investment Partners

Presentation

Operator

Good morning everyone and welcome to the Travelzoo second quarter 2010 financial results conference call. At this time all participants have been placed in a listen-only mode and the floor will be open for questions following the presentation. Today’s call is being recorded.

It is now my pleasure to turn the floor over to your host, Chris Loughlin, Travelzoo Chief Executive Officer. Sir, you may begin.

Chris Loughlin

Thank you, operator. Good morning and thank you all for joining us today for Travelzoo’s second quarter 2010 financial results conference call. I am Chris Loughlin, Chief Executive Officer. With me today is Wayne Lee, the company’s Chief Financial Officer.

Wayne Lee

Good morning everyone, welcome to our conference call.

Chris Loughlin

Before we begin, Wayne will walk you through today’s format.

Wayne Lee

I would first like to remind you that all statements made during this conference call and presented in our slides that are not statements of historical facts constitute forward-looking statements, and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could vary materially from those contained in the forward-looking statements.

Factors that could cause actual results to differ materially from those in the forward-looking statements are described in our Forms 10-K and 10-Q and other periodic filings with the SEC. Please note that this call is being webcast from our Investor Relations website at www.travelzoo.com/earnings.

Please refer to our website for important information including our earnings press release issued earlier this morning, along with the slides that accompany today’s prepared remarks. An archived recording of this conference call will be available on the Travelzoo Investor Relations website at www.travelzoo.com/ir, beginning approximately 90 minutes after the conclusion of this call.

For the format of today’s call, Chris will review management’s prepared presentation, and we will then conclude with a question-and-answer session. If you will now please now open our management’s presentation, which is available at www.travelzoo.com/earnings, I will now turn the call over to Chris.

Chris Loughlin

Thank you, Wayne. Our presentation will fall into two parts today. First, I will talk about our financial performance, and second, I will provide an update on our growth strategy.

So let’s to turn to slide 4. I would like to highlight our key performance metrics for Q2 2010. We are quite pleased that our revenues grew by 19% to $28.1 million. Our earnings per share doubled from $0.10 to $0.20. Subscribers grew to 18.3 million.

The next slide provides more detail on our operating income. Operating income for the company in Q2 2010 was $5.9 million. That consists of operating income of $6.7 million in North America and an operating loss in Europe of $800,000. Our income tax expense was $2.7 million resulting in our net income from continuing operations of $3.2 million. Our effective tax rate in Q2 2010 was 46%. As you can see in the chart here, these are all significant improvements on Q2 2009.

Turning to slide 6, we see our revenues by segment. Revenues in North America grew by 12% year-on-year, maintaining a growth rate we had seen in previous quarters. In Europe, revenues increased 49% year-on-year and in local currency terms, they increased 55%.

In Q2 2010, we experienced a series of macro events that affected our performance in Europe, including the ash cloud, airline strikes, postponed travel demand due to the World Cup and the great prices. These events hampered our advertiser confidence.

On slide 7, you can see that our operating income increased year-over-year from $3.4 million to $5.9 million despite an increase in salaries and employees expenses due primarily to higher headcount and greater investment in Fly.com marketing.

Slide 8 and 9 give us more insight into our operating expenses. First, here on slide 8 we can see that operating expenses in North America increased slightly compared to Q2 2009. However, because our revenues increased by 12% operating expenses decreased as a percentage of revenue, from 71% to 64%.

On slide 9, we can see that European operating expenses increased by $1.5 million. This is due to increased spending on subscriber acquisition and marketing of Fly.com. However, as a percentage of revenue, operating expenses decreased from 125% to 110%.

Moving on to slide 10, this shows the headcount increased from 201 in Q1 2010 to 208 in this quarter, and revenues per employee decreased from $542,000, but remains stable versus Q2 of 2009.

On Slide 11, we focus on audience growth. On the left hand side here, you can see our annual audience growth since 2007. From the end of 2007 to the end of 2008 we grew by 9%. From the end of 2008 to the end of 2009 we grew by 24%. And since the beginning of this year we’ve already grown the audience by 9%. To the right hand side, you can see that in Q2 we added 1.1 million new subscribers, but we also unsubscribed 600,000 subscribers. So we have a net increase here of 500,000.

Finally, page 12 takes a look at our cash management. DSOs, days sales outstanding, increased slightly to 45 days compared to Q1 2010, and we ended the quarter with $31.9 million in cash and cash equivalent.

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