Holger Bartel - Executive Chairman Glen Ceremony - CFO Chris Loughlin - CEO.

Dan Kurnos - The Benchmark Company Ed Woo - Ascendiant Capital Tom White - Macquarie.

Good morning, everyone, and welcome to the Travelzoo Second Quarter 2015 Financial Results Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be open to questions following the presentation. Today's call is being recorded.

Before introducing you to your host and beginning the company's presentation, the company would like to remind you that all statements made during this conference call and presented in the company's 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 may 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 the company's forms 10-K and 10-Q and other periodic filings with the SEC.

Unless required by law, the company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Please note that this call is being web cast from the company's Investor Relations Web site at www.travelzoo.com/earnings.

Please refer to the company's web site for important information, including the company's earnings press release issued earlier this morning along with the slides and accompanying today's presentation remarks.

An archive recording for this conference call will be available at Travelzoo Investor Relations Web site at www.travelzoo.com/ir, beginning approximately 90 minutes after the conclusion of this call. Now it is my pleasure to turn the floor over to your host, Holger Bartel, Travelzoo's Executive Chairman. Sir, you may begin..

Thank you, operator. Good morning and thank you all for joining us today for Travelzoo's second quarter 2015 financial results conference call. I am Holger Bartel, Executive Chairman of Travelzoo. Joining me today are, as usual, Chris Loughlin, our Chief Executive Officer, and Glen Ceremony, the company's Chief Financial Officer.

Glen will walk you through today's format..

Thank you, Holger. For the format of today's call, I will review our second quarter financial results, and then Holger will provide an update on our strategy. Thereafter, we will open the call for our question-and-answer session.

Now please open our management presentation which is available on our Investor Relations web site, at www.travelzoo.com/earnings, to follow along with our prepared remarks. Slide 3, provides the key financial highlights for the quarter.

Our revenue for the quarter was $34.1 million, down 8% year-over-year, after adjusting for the negative FX impact, our revenue was down 3%, which was driven by lower local deals and getaways.

Our earnings per share this quarter was $0.09, which is lower than the prior year period, due primarily to the significant increase in spending on member acquisitions, marketing and products. Our members grew 4% year-over-year and our social media followers and mobile app downloads continued to increase. Slide 4 highlights our revenue by segment.

Revenue in North America was $23.7 million, representing a year-over-year decrease of 6%. Revenue in Europe was $10.3 million, representing a year-over-year decrease of 12%. However, after removing the negative FX impact of the Euro and British Pound, the Europe revenue increased by 1%.

The next few sliders cover further detail of our North America and Europe segments. Slide 5 shows the North America year-over-year revenue decrease by $1.5 million. $900,000 was due primarily to lower voucher sales for local.

$100,000 was due to lower Search spend, and $500,000 was from travel, driven by the transition from voucher sales for getaways, to the hotel platform, where we recognized revenue later. In local, voucher sales coming from push promotions have decreased, as we have focused on deals that are available on a pull basis.

Given that the year-over-year FX impact on Europe revenue was approximately $1.5 million, slide 6 presents the Europe year-over-year revenue on a constant currency basis, and shows that the overall Europe revenues increased by 1%, or by $116,000, due to travel and Search increases totaling $391,000, driven by increases in airline and vacation packager revenue, offset by a decrease in local of $275,000.

Slide 7 provides a breakdown of our operating income. We had $2.6 million in overall operating income. North America had $2.5 million of the operating income and Europe had $100,000. The operating income is lower year-over-year, due to the $3.5 million increased investment in our member acquisitions, marketing and product development.

We continue these investments despite lower revenues related to our product transformation, and therefore, this lower operating income during the quarter. In addition, the operating income was higher in the U.S. compared to Europe in the current quarter, as our increased marketing spend was weighted more towards Europe.

Our taxes represent taxes at the U.S. federal and state tax rates on the U.S. income, as well as the tax matter recorded in the quarter, impacting this quarter's EPS by $0.01. Slide 8 shows the cost of revenue and operating margin. The cost of revenue as a percent of revenue increased year-over-year and quarter-over-quarter.

This was driven primarily by an increased portion of our revenues that were syndicated through our partner network, which comes with related partner costs. Operating margin was lower, primarily due to our increased investment in member acquisition, marketing and product development.

Moving on to slide 9, our overall operating expense was up by $700,000. North America operating expenses increased year-over-year by $800,000, due primarily to our effort to improve productivity, offset by the planned increased in member acquisition, marketing and product.

Europe operating expenses were up by $1.5 million, driven by our planned increase in member acquisition, marketing and product development, offset primarily by the positive FX impact on expenses. Slide 10 shows that our headcount decreased this quarter by 15 employees.

Productivity continues to improve year-over-year, but decrease slightly this quarter, as our second quarter revenues are typically lower than revenues in the first quarter, due to seasonality. Turning to slide 11, this shows our DSO was higher, due primarily to an expected longer collection cycle from one of our new partners in Search.

We generated positive operating cash flow this quarter, and our cash position was up from $54 million last quarter to $55.3 million in the current quarter. As a reminder, much of our cash is held in the non-U.S. locations, and will be subject to U.S. taxation, if we bought it back to the U.S.

Therefore, we have been careful to manage our capital allocation, within each region. Turning to slide 12, in summary; first, revenue declined as expected, yet the majority of the decline was due to FX, and the remainder was from the expected declines in getaways and local.

Second, we increased our investments in member acquisitions, marketing and product development by $3.5 million, which lowered profit for the quarter, and third, our cash position remains solid.

Looking forward to our third quarter, we expect the following; we expect the recent year-over-year percentage rate declines in revenue that we have experienced over the last several quarters to persist.

This is due to the transition of the products that is still underway, loss of certain vacation packager revenue and negative impact of FX rates, all of which are expected to persist. The impact from the FX rates are expected to increase in the third quarter.

The Euro is currently down 20% year-over-year, the British pound by almost 10%, and even the Canadian dollar is currently 17% lower than a year ago. In addition, we expect, as in past years, that our third and fourth quarters will be seasonally slower quarters.

Therefore, we expect lower revenues during these quarters compared to our first and second quarters. We expect to continue our increased investment and product development, as we transform our products, in order to address, what we believe, is needed to enhance and protect our business.

On a quarter-over-quarter basis, we expect an incremental $500,000 of product spend. In addition, we expect to maintain increased levels of member acquisitions and marketing costs over the next several quarters, and we will moderate the investment, subject to the performance of our business.

In summary, we expect to generate lower operating income year-over-year and potentially operating losses driven by our investments. However, we are taking steps to control non-investment area costs and are focused on increasing productivity of our resources. This concludes the financial summary of our second quarter of 2015.

So now I will turn it over to Holger, so he can provide an update on Travelzoo strategy..

Please turn to slide 14; our growth strategy continues to be built on two pillars. On one hand, we are looking to grow our audience, and a particular number of members, as shown on the axis. We have added almost 2 million new members over the past two quarters. At the same time, we are looking to enhance our products to serve our users better.

In other words, we want them to receive deals from us by email and social media, but we also want to help them when they are actively searching for something specific, like hotel room and destination on a certain date. We believe that these product enhancements will result over time in higher revenues per member.

On page 15, let's look at our audience strategy first. Four quarters ago, we have revamped our efforts in growing our member base more rapidly than in the previous two years. We have increased investments into acquiring new members via marketing, and we are also exploring and testing new ways to leverage the existing member base.

We also continue to expand our network of top quality publishers. Page 16 provides more details. In the quarter, we increased member acquisition and related marketing spend by roughly $3 million over the same quarter in the prior year, and particularly increased investments in Europe this time.

We plan to continue these investments and we are also planning to further test various offline campaigns, provided that we meet our internal revenue and profit expectations, these planned investments will continue to affect earnings per share, but we are starting to see some positive impact on revenues from this strategy.

As I mentioned on the past two calls, we are now focusing more on quality of new members, rather than sheer quantity. Let's move to page 17 and our product strategy. We have been very successful in the past 15 years to inspire our users by telling them about great deals at quality places.

We will tell them for example to take a five day trip to Iceland at an amazing price. But when they are simply looking to find a deal for an upcoming weekend getaway in New York, we offer little help. We believe there is a large growth opportunity to serve our users and our members better, by helping them find deals when and where they need them.

How does this strategy translate into our business? As page 18 shows, we are investing into making our products easier to search and simpler to use. In particular, we have launched a hotel platform, which allows users to find deals anytime and book them easily on any device.

We have relaunched that capability on our web site and our mobile site during the first quarter, and have significantly grown the number of hotels on the platform during the second quarter. Once again, revenues from the platform increased quarter-over-quarter.

But as you can see on the bottom right side of the page, moving hotel transactions from vouchers on to the hotel platform, comes with a delay in revenue recognition. Sales of vouchers for hotels are recognized at the time of sale, but net revenues from bookings on the platform are only recognized after the hotel stay has been completed.

This is increasingly shifting revenues into the future. When we look at revenues in the U.S. for example, that we generate for motels; in the past, 100% of those revenues were recognized during the quarter, when a member booked the hotel.

Today, approximately 15% of hotel transactions that occurred in the second quarter, are only recognized as revenues in the future, and we believe as the hotel platform continues to grow, that this percentage is likely to increase further. On page 19, let me talk about our local deals products.

Like all others in the industry, we are seeing a shift in the consumer habits. The purchase deals for restaurants, spas or fun activities less [ph] in advance, but at the time when they need them. This shift from push to pull is also affecting us, and we are responding in several ways.

On one hand, we are increasing the number of deals that are alive on our sites and our apps, which can be purchased over time. And on the other hand, we are developing products that make it easy for our users to find deals close to them, wherever they are. We are also experimenting with alternatives to the relatively richer voucher format.

Mobile purchases, and what I would call, pull purchases, continue to increase year-over-year as a percentage of the total sales. Turning to page 20, we are proud to be the quality leader in this business. Day after day, our staff of over 140 users select, research, negotiate and validate the very best deals.

Whether it’s the Spa at the Four Seasons hotel, or dining at the top rated restaurant, our focus is always on quality. We do not want to recommend any deal to our members, which we would not ourselves, and our test booking centers in Europe and North America ensure that deals that we publish are real and valid, and not just bait and switch.

We believe that our passionate focus on the very best deals at the very best places drive loyalty in the long run and positions us well for long-term success. Let me summarize our management focus again, on page 21. Maintaining and even strengthening our quality content leadership is crucial.

We intend to resume top line growth in multiple ways, via products that make pull equally simple as push and by continuing to grow the number of people who use us. But as we invest on both fronts, we would like to remain profitable. Now back to the operator..

[Operator Instructions]. Our first question comes from the line of Dan Kurnos with Benchmark Company. Your line is open. Please go ahead..

Great, thanks. Good morning, and I apologize if I missed this. Let me just start quickly with a housekeeping question for Glen. Typically, at least in the past few quarters, you had given us directionally how things are pacing in the forward quarter.

Could you provide any color on that in your prepared remarks Glen?.

We did. We expect the decline to persist consistent with the last several quarters..

Okay. And no additional color beyond that? All right, thanks. I must have missed that. And then Holger, for some high level questions, just on the new member acquisition, I guess I really just -- I know we always ask for this kind of data.

Is there anything you can update us on in terms of sort of reconciling, sort of new member acquisition, and the fact that total undue subs were remaining flattish? You have talked about focusing on higher quality subs, so anything that you have in terms of stickiness, repeat rates, five time value, anything that you could add from sort of your learning so far, with the increased marketing spend would be great.

Thanks..

Yeah Dan, we are looking into what more data we can share there. It's also that we are -- one thing to understand is, on the one hand we also have of course, members that unsubscribe.

But then, we also have members that over a long period of time, we see that somehow they are not responding that much anymore, and other members are changing emails, and they change their emails without sometimes unsubscribing. So there are some factors also where just over time, we are unsubscribing members ourselves, not based on their request.

We call this technical unsubscribes and these have actually been a little bit higher this quarter, in Q2, as we use the opportunity of these new members that we have added in past quarters to increase a bit -- these technical unsubscribes. But overall, what that means, is that our member base is increasingly active.

In fact, when we look at some of the engagement levels in the second quarter, those have some of the highest levels that we have seen in quite a while. But I understand you want to see some more concrete details and we are currently looking at what we can share on an ongoing basis..

Yeah, I mean that was going to be the second part of my question. So its good to sort of get at least -- a little bit color on whether there is some intentional churn from your side, or how that's pacing? And I am sure you guys will provide us with more data, once you have it.

Can you just talk a little bit about the shift to syndicated deals, the impact on COGS, if that's going to continue going forward, and how that sort of plays into the overall business plan?.

Yeah, I will let Chris answer that question. But let me just point out, I mean, this quarter was really characterized by a couple of things that really made -- makes the financial picture look worse than it is, on the one hand. And Glen pointed it out, the exchange rate, which really cut revenues down by 5%.

And then we stressed it again, that the effect of hotel bookings on the platform, which really moved revenue into future quarters, and then the Canadian dollar is now dropping. So taking that altogether, if we actually reported in Euro, not in U.S. dollars, we would show a significant growth.

So overall, the quarter looks -- I think is actually better than it looks at first sight. But let me move to Chris, let me hand over to Chris now to answer the question on syndication with our partners Chris..

Dan, can you repeat the question on syndication please?.

Yeah, I was just curious, Chris, on the impact if there is a strategic decision to move more towards a syndicated model.

Obviously we saw the tick-up in COGS as a result this quarter, and if that's going to persist, and just how you think about -- how that plays into your role strategy?.

We have been running a syndication business for about seven years now. So the LA Times, Chicago Tribune run our deals. More recently, two opportunities have presented themselves; one is -- looking at what our members are looking on our site, and then introducing them to those destinations on other sites, two data [ph].

And the second is actually Facebook; because we have got such an enormous audience, I think we are the second largest travel brand on Facebook behind Expedia worldwide. We are able to talk to our members on Facebook, and we are testing right now, both of those models. And that's why you saw an impact on the margin.

I am not sure if that continues or not, because we completed the testing phase now..

It's definitely not a strategic change, it's probably more a result of people responding more to our deals and actually our -- sometimes we work with these publishing partners, and if they are happy, then they put us in more placements and more sites and that's increasing.

But it's not something that we are very happy about, but it's not something that we are putting a strong strategic emphasis on..

Okay, that's helpful. I just wanted to make sure it wasn't a strategic shift to maybe go after more partner distribution. Thanks for the clarity on that. Then just I guess, lastly for me; I am assuming some marketing spends as a portion of the sales and marketing line. We are assuming that's constant.

The pretty big headcount decrease, obviously the quarter even better, I think, than we were anticipating due to the reduction in G&A. And I am assuming sales and marketing down quarter-over-quarter came from reduction in sales commission.

So just how much excess fat do you think you have to trim on the headcount front at this point, and when do you start getting more aggressive in building out net people, I guess, when you have that platform that you really want to start monetizing better?.

Dan, it's not really something where we have any specific targets. You remember that I came back on board as Executive Chairman, less than a year ago.

And one of the areas that's definitely important to me to run this company efficiently and I think, the entire team and every person who works for Travelzoo has really contributed over the last couple of quarters, and what we internally call, raise the bar.

Its really, how can we do the same things with less resources, and how can we also be more performance oriented. Like every company, we have fantastic players and we have some weaker players, and we want to continue to grow the strong ones and if someone doesn't perform, doesn't make sense to keep them forever.

So it's something we will continue to do, but I wouldn't necessarily talk about any excess fat. I also think our bigger focus is really on bringing the company back growth, that's my biggest intention [ph], how can we bring the company back into a growth mode, plus we don't want to be a company that is continuing to report declining revenues.

And we have a lot of product improvements in the works. Not so much that people can see it, but we are working a lot of things internally, testing a lot of things I think that will -- we will see a lot of these -- a lot of these things coming out in the second half of the year..

Okay. I will probably bug you a little bit more about that offline. Thanks for the color. I will step aside, and let some other people ask some questions..

Thank you. And our next question comes from the line of Ed Woo with Ascendiant Capital. Your line is open. Please go ahead..

Yeah, thanks for taking my question. I had a general question about the travel industry. How are you seeing things out there? Is there any big differences in how the industry is doing in the U.S.

versus international?.

Chris, do you want to take that one please?.

Yeah sure. I mean, Ed, it’s a story of many different areas, right. So New York City is massively oversupplied right now, and we are seeing tons of deals in that market. On the air side in North America, the business is very robust. The price of oil is helping on the pricing. So we are seeing deals but the airlines [indiscernible].

Destination seemed to be quite bullish at the moment. They are spending quite nicely. In Europe, the U.K. is robust. I am actually here right now, and I am just shocked at how many people are visiting London. And the rest of Europe is rather obviously a concern. But the Germans don't travel.

So given that our Eurozone is primarily our German market, I don't think we see much of an impact from the weak Europe..

Great. And it seems like on an FX neutral basis, you guys did a lot better in Europe versus North America.

Was there anything specific about that?.

Chris. I have to say -- before Chris responds, I have noticed in Europe this year, really a massive amount of American tourists, as you can expect with the Euro being so weak, a lot of Americans have decided to go to Europe. We have quite an audience in North America.

So as these people are looking more for deals in Europe that obviously will also help European revenues.

Like some people probably decide to go to Europe this year, rather than doing a domestic vacation or going to Hawaii or the Caribbean; because I spoke with a few people, felt like wow, now is the opportunity to go to Europe and take a big trip, because it's as cheap as it has been in more than 10 years..

And if you actually dig into the numbers; Holger had a slide in there that talked about 15% of the hotel revenue is delayed into a future period. That is only happening in the United States right now. It's not happening in the U.K. and Germany. So if you took that 15% back, I think the picture in the United States would in fact look a lot prettier.

Obviously, we are not excited by the fact that it would be flat, but it's still a lot better. We had some challenges with some tour operators, but we have really turned that situation around now, and that was in the United States, and on the cruise side, its funny -- in the United States, we have more demand than we can handle net income cruise.

But then in Europe, we actually have less demand than we can handle, because a lot of the cruise lines move their ships out to the Caribbean, given the fears in the Middle East and so forth. So I wouldn't say, the North America picture is as bad as numbers paint, given that revenue delay..

Great. Then the last question I have is on hotel platform. It definitely looks like you guys have increased the amount of availability of different products on the platform. Are you at a point now where you think your platform in the U.S.

is in a pretty good shape? And what about the plans for international expansion?.

We are much happier with the content, as we see ourselves. In fact, response from people after using the hotel search and searching for deals by date have been quite pleased. We are still making a couple of adjustments to the -- when deals are not available.

But to communicate that properly, but overall, yes its something we intend to promote much more aggressively, and make it more visible on the homepage fairly soon. With regards to international roll-out, yes we will do that actually quite quickly, after we are confident that the product is good, than what we achieved in North America.

Obviously, it would be foolish to roll something out internationally, particularly in an aggressive manner if the product hasn't [indiscernible] in North America. But quite happy with the response.

We are seeing quite good conversion rates in the markets where we have now good content, and people tell me like wow, I am really surprised, what a fantastic deal I have found on Travelzoo with this hotel search. So we are quite happy about it..

Great. Well thank you and good luck..

Thank you and our last question comes from the line of Tom White with Macquarie. Your line is open. Please go ahead..

Great. Thanks for taking my question guys. Maybe just two or three if I could.

Just firstly on -- I was hoping you could maybe just kind of comment on what you're seeing in terms of your efficiency of your subscriber marketing, kind of by channel? I guess I am sort of curious, if -- whether the ROIs you guys are seeing in the various channels that you spend, are sort of stable, are they improving, are they declining, and then, sort of against that backdrop, maybe just talk a bit more about the decision to more into offline marketing? Kind of what's driving you guys to explore that?.

There is not a lot of detail that we can provide you actually, because we are still also testing a few things. And the one thing we can see, what we can see that offline, we are acquiring members at the higher costs. But the quality of these members is also better, that seems the piece of learning so far.

But we haven't really done that much in offline. So we have to continue to work on that, but the initial results are quite positive..

Okay. And then, Holger, you hinted at some sort of interesting things in terms of the product roadmap.

I don't want you guys to give anything away that you're not ready to, yet, but any kind of color you can give around maybe just types of new products or types of new tools or functionality that you guys are working on?.

It's really not so much about anything new. We have been seeing for a couple of quarters now, I am very keen on making our product more searchable. So when a member or user comes to our site and mobile, and mobile is on the verge of being now 50% of our traffic.

When people come, I want them to easily find what where, and when they need the web site, and the mobile site doesn't do that well right now. Our app is getting increasingly better, but that's really the prime thing that we are working on and making this -- creating this in a way that it's really simple and easy to use for our users..

Okay. And then just lastly, when we think about sort of the lag in the revenue recognition between the voucher business and kind of the more marketplace driven business? I think some of the other OTAs talk about the booking window as sort of days and weeks, not months.

I guess any sort of color on what we should sort of expect or what sort of that booking window looks like for you guys?.

I will let Glen respond to that.

Glen?.

Yeah, hi Tom.

It does vary by quarter, but it's not a matter of days, right? So we will do deals through our booking engine and push those out and they can be used and people can access and book those many weeks in advance, right? I think what we are trying to communicate is, through this transformation, before with the getaway voucher's model, right, we recognized all the revenue when we did the sale, and then people would book through the hotel, right, and later, stay, right.

And our revenue was recognized all upfront there. Versus this booking platform, this hotel platform that we are using is just upon stay, so that's what we are trying to analyze the differences is where we used to get it all upfront, now some of it is pushed to the next quarter.

But we are not talking quarters away, right? I mean, it's rolling into the next quarter, the majority of it..

Okay. That's helpful. Thank you..

As an important distinction of our business versus the major OTAs. We are still predominantly a dealers business, and so when we send out that deal, we give a specific data you can stay on, and that could be 60 days out, 45 days out. And a very different behavior to you going to an OTA and saying, I need a hotel tonight or tomorrow night.

And so, the window [indiscernible] will be longer than the others, given the nature of our business..

Okay, thanks..

Thank you. And I would like to turn the conference back to Mr. Holger Bartel for any further remarks..

Okay. Thank you everybody for joining us today. We look forward to speaking with you again next quarter. Bye-bye and have a great day..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect..