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

Ed Woo - Ascendiant Capital Markets Tom White - Macquarie Research.

Welcome to Travelzoo Third Quarter 2015 Financial Results Conference. [Operator Instructions].

Before introducing you to your host and beginning with 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 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 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 webcast from the Company's Investor Relations website at www.travelzoo.com/earnings.

Please review the Company's website for important information, including the Company's earnings press release issued earlier this morning, along with the slides that accompany today's prepared remarks.

An archive 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. 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 third quarter 2015 financial results conference call. I am Holger Bartel, Executive Chairman of Travelzoo. Joining me today are 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 and everyone for joining us today. For the format of today's call, I will review our third 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 website at www.travelzoo.com/earnings, to follow along with our prepared remarks. Slide 3 provides the key financial highlights for the quarter.

These results include the financial results of the Asia Pacific business we acquired this quarter, for the full customer quarter and for prior periods as well. Our revenue for the quarter was $33.7 million, down 7% year over year or down 2% in constant currencies.

Our non-GAAP earnings per share this quarter was $0.03 which is $0.06 higher than the prior-year period. In addition, our members grew to over 28 million with the acquisition of Travelzoo Asia Pacific and our social media followers and mobile app downloads continue to increase.

The next few slides provide a view on our financial progress over the next few quarters. Vast changes in foreign currency exchange rates and our investments in member growth and product enhancements have been overshadowing some positive trends. Slide 4 demonstrates the steady progress we're making on revenues, costs and profitability.

Year-over-year revenue growth in constant currencies have been improving over the past 12 months. Similarly, year-over-year changes in operating income and EPS have improved steadily.

Slide 5 highlights that this improvement is despite our increased investments in audience and product development, as we had focused on operating smarter and increasing margins in order to help fund these investments. We're also pleased that revenue growth has resumed in most of our markets.

As slide 6 shows, revenues grew in constant currencies across Europe and Asia Pacific and Canada returned to growth as well. The U.S. is still lagging, though, as revenues are impacted by some of the product changes we're making.

Slide 7 gives a bit more detail on the revenue by segment, in particularly the negative impact to the year-over-year amounts given the strong U.S. dollar. This quarter we had an overall unfavorable foreign currency impact of $1.8 million.

This negative impact masked the constant currency the year-over-year growth we had in Europe of 8% and Asia Pacific of 7%. The next few slides cover further detail of our revenue for our three segments. Slide 8 shows that North America year-over-year revenue decreased by $2.2 million.

$900,000 was due primarily to lower voucher sales for local, as we had focused less on pushing these deals out and now have more of them available on a pull basis only.

$400,000 of the revenue decline was due to lower search spend and $900,000 was from travel, due primarily to the transition from voucher sales for getaways to the hotel platform, where we recognize revenue later, as well as the loss of certain vacation packager revenue. Given the strong U.S. dollar, over $200,000 of the North American U.S.

dollar revenue decline was due to the negative FX on Canadian revenue. Turning to slide 9, there was an approximate $1.2 million negative FX on Europe revenue. However, Europe year-over-year revenue on a constant currency basis shows that overall Europe revenues increased 8%.

$700,000 of this increase was due to travel, driven by airline and vacation packager revenue increases and search increase of $300,000 from improved monetization; and these were offset by a decrease in local of $100,000.

On slide 10, our third segment, Asia Pacific which we acquired this quarter, shows year-over-year growth in constant currencies of 7%. Most of this growth was in travel driven by airline and vacation packager revenue. Asia Pacific has similar trends on local revenue as other segments, showing a constant currency revenue decrease of $100,000.

Slide 11 provides a breakdown of our operating income. We had $900,000 in overall operating income, North America had $700,000 of operating income and Europe had $600,000. These were offset with Asia Pacific's operating loss of $400,000.

The operating income improved across the board despite continued investments in our member acquisition, marketing and product development. Our non-GAAP taxes of $200,000 include a favorable state tax during this quarter of $282,000 or an approximate $0.02 benefit to non-GAAP EPS for the quarter.

Our GAAP taxes include a benefit of $8.4 million or $0.57 GAAP EPS impact, from a release of a tax reserve related to the unexchanged promotional shares. Slide 12 shows the cost of revenue and operating margin.

The cost of revenue as a percent of revenue increased year over year, due primarily to the increased portion of our revenues that were syndicated through our partner network which comes with a related partner cost. The operating margin percentage increased year over year as we gained more operating efficiencies.

Turning to slide 13, this shows our progress on controlling costs relative to revenue, with the operating expenses in all segments dropping as a percent of revenue year over year, while we maintained our increased level of member acquisition spend.

Slide 14 shows our head count and continued improvement in our productivity year over year, with an expected sequential decrease due to seasonality. Moving to slide 15, DSOs are slightly up, as expected, from our search partner and longer cycle for our Asia Pacific segment.

We used our international cash to acquire the Asia Pacific business this quarter, leaving $34.6 million in cash at the end of the quarter, of which $19.2 million was held outside the U.S.

Turning to slide 16, in summary, first, our revenue for both Europe and Asia Pacific grew in constant currencies; yet we still have work to do to get the North American revenue back to growth by offsetting the declines driven by getaways and local.

Second, we're seeing steady progress in our efforts to manage costs to fund our continued investments in member acquisition, marketing and product development. And third, our cash position after the Asia Pacific transaction 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 experienced in several of our product formats, primarily in voucher sales, to persist. This is due to the transition of our products that is still underway and negative impact from FX rates, all of which are expected to persist.

In addition, we expect, as in past years, that our fourth quarter will be a seasonally slower quarter. Therefore, we expect lower revenues compared to other quarters. We expect to continue our increased investment in product development as we transform our products.

On a quarter-over-quarter basis, we expect an incremental $500,000 of product spend; and in addition, we expect to incur an incremental $400,000 in professional service costs. We expect to maintain the increased levels of member acquisition and marketing costs over the next several quarters.

We plan to increase investments in our new Asia Pacific segment, in particular in China, but we will moderate this investment subject to the performance of our business and effectiveness of the marketing campaigns. In summary, we expect to generate lower operating income year over year and potentially operating losses driven by our investments.

However, we're taking steps to control non-investment-area costs and are focused on increasing productivity of our resources. This concludes the financial summary of our third quarter of 2015. So, now, Holger will provide you an update on Travelzoo's strategy..

Please turn to slide 18. Our growth strategy continues to be built on two pillars. On one hand, we're looking to grow our audience. We have added almost 3 million new members over the past 3 quarters. At the same time, we're 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 a hotel room and a destination on a certain date. We believe these product enhancements will result over time in higher revenues per member.

Slide 19 highlights how our investments align with these two pillars of our strategy -- growth in audience and improvements of our products. First, in the last year we increased our investment in acquisition of new members.

Our focus was to get high-quality members, explore ways to leverage our strong social media presence and test some offline marketing channels. The results have been the addition of 3 million growth new members this year which are expected to yield benefits to our business for years to come.

Second, we've also been working to enhance our product to be more mobile-friendly and to simplify the usability of our product so members can easily find what they are looking for. A lot of work is underway in this area, but has not been placed into production yet.

We have made our emails easier to read on all devices and we have tested ways to deliver more relevant content to our members based on their likes and dislikes which has shown promising early results.

We're still working on an overall simpler search from our website, mobile site and apps and expect these improvements to go live in select countries over the next few months. Third, we continue to enhance our hotel platform for date-specific hotel searches. We have had this live in the U.S.

now for a couple of quarters, yet we're not promoting it heavily to our members until we can present a holistic approach to search on our site, that is still in progress. In the meantime, we're pleased that the number of hotel bookings continues to grow and conversion rates are increasing.

As slide 20 shows, we're seeing early results from these investments. We have seen a 20% increase in year-to-date growth new members compared to last year. This is despite a year-over-year increase in cost per acquisition, given that we're focusing on higher-quality members, targeting in our acquisition campaign.

In addition, the hotel platform commissions have steadily grown as we have introduced and continued to enhance our hotel platform. On slide 21, I would like to highlight our progress in the area of social media and marketing.

It is important for us to get the right deals to our members in whichever form is best for them -- whether on their mobile phone or social network.

Social channels such as Facebook in North America or Europe or Weibo in China, enable us to deliver our content beyond our traditional email delivery and we -- and the unique combination with our brand, as our members really find it fun to share great deals they find from us with their friends.

Turning to slide 22, we're proud to be the quality leader in this business. Day after day, our staff select, research, negotiate and validate the very best deals, whether it's the spa at the Four Seasons or dining at top restaurant, our focus is always on quality.

Our test booking centers ensure that the 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 position us for long-term success. Let me summarize our management focus again on slide 23.

Maintaining and even strengthening our quality content leadership is crucial. We intend to resume top line growth in multiple ways -- via products that make members pulling our deals equally simple as members getting pushed our deals; 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. This concludes our prepared remarks.

Before we move on to the question-and-answer session, on behalf of all of us at Travelzoo we would like to thank Chris Loughlin for his many years of service and contributions to Travelzoo and we wish him the very best as he plans to move into his next venture next year. Now, back to the operator..

[Operator Instructions]. Our first question comes from the line of Ed Woo from Ascendiant Capital. Your question please. .

And Chris, I wish you good luck. It was great working with you.

My question is, what was the rationale for acquiring the Asia business this quarter?.

Glen? Hi, Ed. Glen will answer this question..

So, the rationale for acquiring Asia was, as you know, we had an option to acquire Asia. And just that region in particular, in the long term, has great long-term travel market trends, in particular with China and outbound travel. So, it's definitely an attractive region of the world that we wanted to participate in.

And so, that's what really drove us to do the transaction..

In terms of accounting, do you start including it in your business as of the day of purchase or was it included for the whole quarter?.

Yes, it was included for the whole quarter and for most of the financial information you're seeing it's in all prior periods as well..

Our next question comes from the line of Tom White from Macquarie. Your question please..

European business, you had, I guess, a nice little rebound there, FX-neutral. Can you maybe just help us with how we should kind of think about the trajectory of growth there.

Was that -- it's still relatively small numbers, so is that something that we should sort of think should continue? And any maybe broader comments on what you're seeing in terms of just European travel trends overall. And then I had one follow-up. Thanks..

Chris, why don't you comment on our European business and what the trends are in Europe right now?.

Sure. Tom, we saw some strength there with the German tour operators that was quite positive. And frankly, it was after a heck of a lot of work over the last few years with the team. So, it was a great job by the team. It seems that the German tour operators will remain relatively strong for us which is positive.

And we were able to put a rate increase in there in Germany, so we'll benefit from that going forward. The UK business is just, I would say, rather steady as she goes; not any significant change there..

And then just maybe bigger-picture, when we think about Travelzoo's sort of transition to becoming more of, kind of, a pull-oriented marketplace or product strategy, I guess, what sort of inning do you guys think you're in there in terms of, A, the product; B, sort of scaling out supply. And then just sort of consumer awareness.

Maybe just how you think about each one of those three buckets and how far away we're before you guys feel like the bulk of the work will be behind you on that front. Thanks..

So, Tom, to order a very -- to offer a very simple search for our users and members, it requires a lot of simplification on the back end basis -- content structure; how we even code content. And we've gone through a lot of this. And we're actually actively testing right now a very simplified user search experience.

We're still not completely happy, but it's something that's working right now in beta. As I said earlier, we expect it to, at least in the first phase, go live in the next few months. And so far we've heard very good feedback from users. But in the end, we want to be perfectly happy with the product until we put it in front of millions of people..

Okay. Thank you. I'll turn back now to Mr. Holger Bartel..

Yes. Ladies and gentlemen, thank you for your time and support and we look forward to speaking with you again next question. Thanks. Bye..

Thank you, ladies and gentlemen. This concludes today's teleconference. You may disconnect your lines at this time. Have a pleasant day..