Earnings Labs

Travelzoo (TZOO)

Q4 2005 Earnings Call· Mon, Feb 6, 2006

$10.47

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Transcript

Operator

Operator

Good day everyone and welcome to the Travelzoo Inc. Fourth Quarter and Year 2005 Earnings Conference Call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Travelzoo’s Ralph Bartel. Please go ahead sir.

Ralph Bartel, Chairman, CEO, President, CFO

Management

Thank you operator. Good morning and thank you all for joining us today for Travelzoo’s fourth quarter 2005, financial results conference call. I am Ralph Bartel, Chairman and Chief Executive Officer. With me to is Lisa Su, the company’s Controller and Chief Accounting Officer and Holger Bartel, Executive Vice President.

Lisa Su, Controller and Chief Accounting Officer

Management

Good morning, welcome to conference call.

Holger Bartel, Executive Vice President

Management

Good morning everyone.

Ralph Bartel, Chairman, Chief Executive Officer, President, Chief Financial Officer

Management

Before we begin I would like to walk you through today’s format. First we will discuss the Company’s fourth quarter 2005 financial results. Then we will provide additional information on the Company’s growth in subscribers and Reach. We will then conclude with the question and answer session. Before we discuss the Company’s financial results, released earlier today, I would like to remained you that all statements made during this conference call that are not statements of historical fact. 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. An archived recording of this conference call will be available on the Travelzoo’s investor relations website at www.travelzoo.com/ir beginning approximately 90 minutes after the conclusion of this call. Today Travelzoo announced its 30th consecutive quarter of revenue growth. Basic and diluted earnings per share for Q4, 2005 were $0.10, up from $0.09 for Q4 2004. Travelzoo’s earnings per share for Q4, 2005 increased only slightly from the prior year period as a result of a combination of several factors. Higher SOX compliance costs in Q4 2005, a loss from our UK business, a negative impact on revenues and bad debt expenses, as a result of bankruptcy filings of two airline advertisers, and a very high effective tax rate. We will provide more details in this call. As we stated in our press release this morning, we do not expect SOX compliance cost to remain at this high of a level in future periods. Our revenues which are all generated from…

Ralph Bartel, Chairman, Chief Executive Officer, President, Chief Financial Officer

Management

Thank you, Lisa. In the US we acquired subscribers at an average cost of $2.41 per subscriber in Q4, 2005, compared to $3.19 in Q3, 2005. In the UK, we acquired subscribers at an average cost of $2.02 per subscriber in Q4, 2005 compared to $1.68 in Q3, 2005. During Q4, 2005, Travelzoo added 904,000 new subscribers to its email publications including our popular weekly Top 20 newsletters and newsflash, Travel Deal Alert service, bringing our total subscribers in the US and in the UK to approximately 9.7 million. In the US, Travelzoo’s Top 20 newsletters and newsflash email alert service had a net unduplicated total of 9.4 million subscribers as of December 31st, 2005. This represents an increase of 15% versus the same time last year. Management believes that this shows that Travelzoo s able to successfully generate higher revenues as our reach continues to increases. This concludes the discussion of financial results and the growth in subscribers. Travelzoo’s consistent practice is not to provide guidance for future periods, because of the dynamics of the industry, therefore, this will conclude our prepared discussion and I will turn the call back to the operator, now for the question and answer session.

Operator

Operator

Operation instructions

Management

Q: Hi, this is (Indiscernible) for Marianne. First question is, why are the unbilled revenues duo the bankruptcy filings and then secondly, why did you stop publishing newsletter at the end of the quarter?

A - Ralph Bartel

Management

Good morning, Marianne. Lisa Su our Chief Accounting Officer will take the first part of the question and Holger Bartel, our Executive Vice President will respond to the second part.

A - Lisa Su

Management

Hi, Marianne. The revenues that we delivered to clients that from bankruptcy was $264,000 in Q4, 2005, Holger will answer the second question, thanks.

A - Holger Bartel

Management

Hi, Marianne. The question, when we published Top 20 newsletters in the last week of the year, always depends on which date, the Wednesday, as you might know we publish our Top 20 newsletters, always on Wednesday, this year the 25th fell on Sunday and 26th was a holiday. So, the interest of emphasizes to advertising in a week that is shortened by a such a holiday is lower, so we decided to rather run these ads on the 21st of December, or then in the following week on the 4th of January. So, the main reason is really operational reasons depending on which day the Wednesday after Christmas fall. Q: Okay, thank you.

Operator

Operator

Our next question comes from Conrad Ben Tiaho.

Q - Conrad Ben Tiaho

Management

How are you?

A - Ralph Bartel

Management

Good morning, Conrad. How are you?

Q - Conrad Ben Tiaho

Management

Very well. So, as it relates to the revenues this year with the bankrupt airline, is this – I meant have you, is there been any indication that you are not going to get paid or is this just being conservative?

A - Ralph Bartel

Management

Lisa Su our Chief Accounting Officer will take this question.

A - Lisa Su

Management

Hi, Conrad. Our Company policy is to not recognize revenue once those company have filed bankruptcy, this is the traditional GAAP policy that most companies do follow. We may still collect money on the $264,000 and hopefully we do. But, at this time, we have to take the assumption that we won’t get the money.

Q - Conrad Ben Tiaho

Management

Okay, and now you still, are they still advertising in this quarter?

A - Lisa Su

Management

In Q1, 2006? Actually on of those airlines no longer operating and the other one, I believe is going to be advertising in Q1 2006.

Q - Conrad Ben Tiaho

Management

Okay, and then on the Sarbanes-Oxley stuff it sounded like there was $457,000 increase quarter-to-quarter and that the overall number was closer to $600,000, should we think about that expense as a end-of-year one-time or every fourth quarter type charge or should we annualize that sort of close to $600,000 number as a good number for the quarterly expenses for Sarbanes-Oxley?

A - Lisa Su

Management

I will go ahead and answer that. We actually had expenses for the entire year for about $1 million for 2005. As you know this year was our first year filing to comply with Sarbanes-Oxley. We usually differs your cost a lot higher compared to the following year cost. Hopefully, in 2006 and on, we will be able to lower these costs. So, I really wouldn’t be able to predict how much it would be in 2006, and wouldn’t be able to predict how it would be in quarter-over-over.

Q - Conrad Ben Tiaho

Management

Or should we expect it to be less than $1 million or so?

A - Lisa Su

Management

I would hope so.

Q - Conrad Ben Tiaho

Management

Okay, and then Ralph, may be you can just give us some idea of –it looks like it’s a year-over-year the US subscriber count was up 15%, than you had growth in SuperSearch and you added some international subscribers as well. And then revenue year-over-year was up 32 -- would have been 34 or 35 had not been for bankrupt airlines. As some new you can just talk a little bit about advertising pricing and what you are seeing on the, from what – essentially your ability to rise prices for advertisers or for the newsletters?

A - Ralph Bartel

Management

Conrad I suggest that Holger Bartel our Executive Vice President, will take this question.

A - Holger Bartel

Management

Sure, let me address this very good question on SuperSearch, let me start with that when pricing is determined to a vast degree by the advertiser similar to Google or Yahoo model where you can determine how you want to pay. We are certain, minimum. There we saw from Q4, 2004, to 2005, we saw an increase on the average price that are advertisers are paying 41%. We have increased – we have not increased prices on most products throughout the year of 2005, but we were running in some situation in Q4, 2005, we are some areas in the Top 20 newsletters, specifically hotels were sold out in a quite a few weeks. So, we decided to make some price increase as for 2006, particularly in the areas where we were sold out above our usual inventory levels in Q4, 2005. The other area where we have price increase throughout the year is our newsflash area, we actually saw our newsflash revenues go up 33% in Q4, 2005 versus Q4, 2004. And there because, the reach increases quarter-over-quarter and fee that the advertisers have to pay for every email that they sent out remains flatter, also increases. We have the all fact price increase in newsflash that we will see, our price increase newsflashes as well from 2005 to 2006. So, typically we do most price increase from on January 1st of the year and not so much during the year.

Operator

Operator

And our last question comes from George Mihalos.

Q - George Mihalos

Management

Yes, hi guys. Can you talk a little bit about the launch of the German operation and perhaps some early costs that will be associated with that?

A - Ralph Bartel

Management

Good morning, George.

Q - George Mihalos

Management

Good morning.

A - Ralph Bartel

Management

You noticed that we didn’t talk about the European strategy on the conference call today, we, as she just discussed that in the executive team and we think that talking about our strategy in Europe would extremely more helpful to competitors than to investors. So, we decided, that we do not want to share information on our strategy, in Europe. But, I can confirm is that company opened an office in Munich, Germany, on February 1st, so we plan to expand into Germany that’s a very important market for travel and travel advertising.

Q - George Mihalos

Management

Okay, so, do you expect perhaps the pattern to somewhat nearer, the opening of the London office?

A - Ralph Bartel

Management

Well certainly, what you see in the UK is start up situation. Of course, in the beginning we have higher cost, for example, US, we have to rent more office space then you need in the beginning and also a lot of money you spend in the UK on the subscriber acquisition and these expenses are, actually these costs are accounted for as operating expenses. But, the reality is we had subscribers in the UK and we will benefit from these subscribers for a longer period.

Q - George Mihalos

Management

Okay, and just moving on, it looks the sequential growth in the UK was rather sub-due given it’s relatively new. It cannot be attributed to seasonal factors or is that something else there?

A - Ralph Bartel

Management

Yes, we believe. As you look at the numbers it might give the wrong idea it still fluctuates a lot. The business started in May 2005, the first quarter. The second quarter, we generated $9,000 in revenue was than we went up to $368,000 and now $380,000. In Q3 we have one very large introduction order. And we had in Q4, we have a much more – we saw a much more diversified client portfolio with the good mix of introduction orders, so I wouldn’t draw conclusions from the small increase from Q3 to Q4, I think we have to wait for Q1 and Q2 2006, and than see how it goes.

Q - George Mihalos

Management

Okay, and just last question. Can you give us the number of SuperSearch queries during the quarter or if can’t provide that figure, the growth perhaps in sequential basis?

A - Ralph Bartel

Management

George, I suggest that Holger Bartel our Executive Vice President.

A - Holger Bartel

Management

Okay, in 2005 we had 11,881,000 searches and that is up 41% versus Q4 2004. And just to reiterate what Ralph said last year. If you look at last year we had sequential growth from Q3 to Q4 for the Company overall that was much larger than what we are seeing this year or what we were seeing this year in 2005. Last year we still had effect of a growing SuperSearch tool that was just introduced a few months earlier, so last year we saw bit of sequential growth. But, in general, yes Q4 is definitely a seasonally always a quarter, where we are seeing less usage on the website, where we are seeing some advertiser holding of an advertising, in general. Our Q4 is a quarter where we some seasonal effect.

Q - George Mihalos

Management

Okay.

Operator

Operator

I will turn back now to Mr. Bartel.

Ralph Bartel, Chairman, Chief Executive Officer, President, Chief Financial Officer

Management

Ladies and gentlemen, we thank you for you support. We look forward to speaking with you again next quarter, have a nice day.

Operator

Operator

Thank you, ladies and gentlemen, this concludes today’s conference. You may disconnect your lines at this time and have a nice day.