Glen Ceremony - CFO and Corporate Secretary Holger Bartel - Global CEO.

Daniel Kurnos - The Benchmark Company Edward Woo - Ascendiant Capital Markets.

Good morning, everyone, and welcome to the Travelzoo Second Quarter 2017 Financial Results Conference Call. [Operator Instructions]. Today's call is being recorded.

Before introducing your host in the beginning of 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 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 on the company's Investor Relations website at www.travelzoo.com/earnings.

Please refer to the company's website for important information including the company's earnings 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. Now it's my pleasure to turn the floor over to your host, Holger Bartel, Travelzoo's Global CEO. Sir, you may begin..

Thank you, operator. Good morning, and thank you all for joining us today at Travelzoo's Second Quarter Financial Results Conference Call. I'm Holger Bartel, Global CEO of Travelzoo. And joining me today, as always, is 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 second quarter financial results, and then Holger will provide an update on our business initiatives. 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. Now let's turn to slide 3, which provides the key financial highlights for the quarter.

Our revenue for the quarter was $26.4 million, down 11% year-over-year or down 8% in constant currencies. Our diluted earnings per share from continuing operations this quarter was $0.05, down year-over-year, driven by the impact of revenue, geographical impact on taxes and FX rates. Our members grew to 29.3 million.

And our social media followers and mobile app downloads continue to increase. Slide 4 highlights our revenue by segment. Revenue in North America was $16.6 million, representing a year-over-year decrease of 7%. Revenue in Europe was $7.9 million, representing a year-over-year constant currency decrease of 9%.

And Asia Pacific revenue was $2 million, representing a year-over-year constant decrease of 16%. The next few slides cover further detail of our revenue for each of our 3 segments. Slide 5 shows details of the North America revenue.

Revenues from our core products, Top 20, our new responsive site and from our hotel platform increased by more than 10% year-over-year. Yet as we were more selective in bringing our members the best offers and as we bounced the content in our new flash products, overall travel revenues remain relatively flat.

Revenues from our Local products were $1 million lower than a year ago. Turning to slide 6. The FX impact on Europe revenue was approximately $0.7 million. On a constant currency basis, Europe revenue was $8.6 million, which is lower than a year ago and was driven mostly by a challenging season and industry for sourcing deals and offers in the region.

On slide 7, Asia Pacific revenues were impacted again by understaffed sales teams. We've made some progress including the hiring of new general managers in Hong Kong and Australia, which we hope will improve results in the upcoming quarters. Slide 8 provides the breakdown of our operating income. We had $1.4 million in overall operating income.

North America continues to generate strong profitability of $2.3 million in the quarter. While Europe generated $300,000 of operating income, Asia Pacific recorded operating loss of $1.2 million consistent with the prior-year period.

Income taxes were at $800,000 and lower than prior-year period, primarily due to resolution of certain tax matters resulting in the release of tax reserves. This activity accumulated to net income for the quarter of $700,000. Slight 9 shows the cost of revenue and operating margin.

The cost of revenue, as a percentage of revenue, has continued to fluctuate around 11% to 12%. Slide 10 presents our operating expenses by segments. Our operating expenses were lower year-over-year in all 3 segments. Relative to revenues, we increased our investments in marketing in Europe and Asia Pacific.

Slide 11 shows that our productivity was slightly down driven by seasonality. We also made some investments in new hires, which increased headcounts versus the prior quarter. Moving to slide 12. DSO improved, driven by the runoff of a longer collection cycle customer that was related to our discontinued SuperSearch in Fly.com businesses.

In addition, we continue our stock repurchases, which totaled $5 million and made estimated tax payments amounting to $2.9 million. We exited the quarter with a solid cash position of $21.3 million, of which $10.7 million was held outside the U.S. Turning to slide 3.

In summary, the financial performance remains positive in North America, particularly in our core travel products. However, Asia Pacific continues to be impacted by understaffing of their sales team. We have made improvements in operating costs from our continued focus on operating smarter.

And we have maintained a solid cash position despite cash outflows from large tax payments in the quarter, the reduction of payables and continued stock repurchases. Looking forward, we expect the following, for the third quarter, we expect similar year-over-year changes in revenue as we have experienced over the last several quarters.

However, we are aiming to return to revenue growth by the fourth quarter of 2017 or first quarter of 2018, mainly driven by an increase in revenue from expanded offerings in our travel products. We expect a continued negative FX impact on our Europe revenue.

We are planning to increase member acquisition and member marketing spend, and we plan to increase investments in Asia Pacific, in particular in China, which will reduce year-over-year EPS by approximately $0.03. We expect an additional $400,000 of certain expenses in Q3 related to non-recurring expenses in the quarter.

In summary, given these trends and investments, we expect lower revenues and operating income year-over-year in the short term. Holger will outline the various initiatives underway to drive purchases and bookings by our members in the next 6 to 12 months.

We continue to take steps to control non-investment areas and costs and are focused on increasing the productivity of our resources.

We believe the steps we are taking including our focus of all resources on global Travelzoo brand, our removal of unprofitable business activities, our focus on our members and the way we engage with them through our enhanced websites and apps, our expanded offerings in the areas of hotels, vacations and local businesses as well as our continued investment in our member acquisition.

All collectively work to help position us for future growth in the global travel industry we operate in, which has positive long-term growth prospects. This concludes the financial summary of our second quarter of 2017. Now Holger will provide you an update on Travelzoo's business initiatives aimed to drive growth..

Well, I'd like to start off by saying that we are not satisfied with the results from the second quarter. But positive trends continue in North America, but we have not reached yet the overall year-on-year revenue growth that we'd like to achieve.

I thought it might be insightful to share some of the business initiatives that are underway, which we believe will return us to growth mode in the next 6 to 12 months. These are shown on slide 15. First, now that we can put 100% of our resources against our global Travelzoo brand, we are expanding our offerings.

Being a Travelzoo member is great, but we want to make Travelzoo membership even more attractive. So we're working to add exclusive benefits and member perks. We also know that exclusive offers drive sales and bookings. Bookings from our hotel platform and search are growing, yet we want to accelerate the pace of growth.

So we are adding more exclusive rates and offers, which we've found to dramatically increase conversion rates. We've also started to break down the countryside loss in which our offers resides today. And our platform for hotel deals and special offers for our members is now fully globalized.

Members worldwide now have access to any offer that we have negotiated from of one of our 25 offices around the world. We're also broadening our offering in the area of packaged vacations with more exclusive offers for our members. We do this with partnerships, but we're also looking into investments into other companies or possibly acquisitions.

On the product side, we are making it simpler for our hotel partners to create deals for our members.

We have developed personalized alert services, so we can inform those members who're particularly interested in a specific offer or destination, and we've started to make investments into creating a more personalized product experience with our members.

We are close to launching an updated app with China being the initial market, as we see a great app experience is critical to succeed in this vastly mobile market.

In marketing, we need to create more visibility for the Travelzoo brand and better and more actively communicate the benefits of Travelzoo membership to both existing as well as prospective new members. We've also begun to work on a loyalty program with a goal of motivating our members to shift their usage to Travelzoo and use us more frequently.

All these activities will not change the financial performance immediately, but we believe that we can return the company to overall revenue growth over the next 6 to 12 months in order to create a solid footing to grow earnings over the mid- and longer term.

To summarize, on slide 16, as we maintain quality leadership, we are aiming to increase the number of exclusive offers for our members that are available on-demand. And our goal is to resume top line growth but in a smart way. Some investments are needed, but we'd like to maintain profitability. This concludes our prepared remarks.

Now back to the operator..

[Operator Instructions]. Our first question comes from Dan Kurnos with Benchmark..

Great. Just a couple for you guys here. I think the quarter was pretty much what we had expected. Q3, maybe a little bit softer, but nice to hear sort of a turn around.

Over from it -- from kind of like a high-level, is there anything you can give us now -- metrics around the hotel platform offering in terms of either total hotels you've signed up, availability -- any availability issues you're seeing and/or just any metrics around participation with that using it as sort of an augment to the daily deals or in lieu of it?.

Yes, I mentioned that the bookings and revenues from the platform are growing.

Keep in mind that platform really serves two things, number 1 being, it's really a place where we can promote our special offers and deals to, as I said, members around the word; second, in a few countries it also serves as a platform to allow users to search for hotels by date.

And what we've seen is that if we have more exclusive and special rates and offers for our members, conversion rates are much better. So that's the area, that's the direction in which we are going. And in the markets where we've done that, there are a couple of them in the U.S., we have been piloting this, the results have been quite good.

Overall, revenues from the platform has still being growing year-over-year. They're well above 10% growth but that's not enough. We're going to do better, we want to accelerate this growth..

When you negotiate these rates, which obviously a lot of people are trying to do, do you end up getting rates for full year? Is there a certain time period? I'm just want to -- curious if you have any issues with availability? Or if you negotiate those rates on annualized basis and they can remain on the platform for as long as you have that contract negotiated?.

It really depends on hotel and differs from hotel to hotel. But it's really essential that we are expanding this area, because one of the things we have seen in Europe, and I mentioned it earlier, it's really become difficult there to source really amazing deals.

Why? Well first of all, people stay much closer to home, for example, in Germany we see more Germans just vacationing in Germany this year; in the U.K. more people are staying at home. Then also we are seeing no more interest in what could be considered by consumers safe destinations.

For example, Spain or Portugal, actually I have been in Europe for the last 2 weeks, and for example, in Portugal, I've heard that hotels are very full, Lisbon is just inhibited by tourists. While other destinations such as Egypt and Turkey are not doing very well.

In fact, the German -- one of the German ministers actually warned people even about traveling to Turkey. So what that means, it makes it difficult to get deals in destinations like Spain and Portugal. So what we are doing in order to deal with that is -- because we have a very high standard for the offers that we promote to our members.

We just don't want to promote something that's not really a great offer, but what we are doing with regards to this step, we need to have more deals that are on demand. And we think we can work with hotels. for example, Spain and Portugal to create offers either hotel-only or as packages to with our partners that are very attractive to our members.

And we feel that's really critical in order to balance off the decrease we are seeing in promoting deals in places like Top 20..

Got it. And then you mentioned kind of visibility of the Travelzoo brands. Obviously you guys have been trying to advertise smarter and maybe pay up a little bit more to get a higher LTV per sub for a user that tends to be a little bit stickier.

I'm curious, as you think about the market on a go-forward basis, how you're going to balance pure customer acquisition with maybe getting brands in the marketplace and seeing if you can acquire subscribers, which naturally might be a little bit less sticky but certainly you might be able to get broader reach for cheaper going certain broad-reach media?.

Well look, 10 years ago we had a very, very poor website experience, now we have a new website, a responsive website, can be used on any device, it's very search-driven. When someone comes there's really something that they can do on the website.

So in the past, we really could only focus on acquiring new members, now we can really focus on -- or we can much more broadly market and advertise Travelzoo brand, because when they come to our site there's something they can do, and they will learn that if they sign up and become a member, they have access to these hundreds and hundreds or even thousands of exclusive offers.

So we feel that's much better opportunity now to a different type of marketing and that's where we want to go, because overall I feel the visibility that our brand has should be much bigger. We're still, in some countries, a brand that people look at and say, "Wow, it's great. I remember." But then you have people who've just never even heard of us.

So -- but that's not a negative, in fact, we see this as a great opportunity..

Can you talk about pushing the brand marketing via social? Obviously, you guys have a strong social Facebook presence, and I'm just curious how you're thinking about -- which channels you're going to press as you try to get sort of the brands out there if you might go traditional TV, or if there are other niches plays? And how you think about online versus offline?.

Absolutely. Social is key, you just said it, it's the key. And we're proud of our social following of Travelzoo, we're one of the strongest [indiscernible] to the size of the brand, we're probably one of the best. And you're right, probably 70%, 80% of our marketing efforts these days go into social marketing.

So we're not looking at TV advertising at this point of time, but we are looking at ways how we can enhance the visibility to -- of the brand. And one thing you might have noticed, we've become much more active with regards to press. We get more coverage everywhere across the board for all of the things we do.

We just had a huge event in New York that was attended by a lot of women, because we have now the highest ratio of female board members, which is great. Because it represents really who the majority of our users are. Our members are primarily female, they love us.

And having a board like that helps us a lot to -- and particularly, with all the experience that is on the board, it helps us a lot to understand all the various markets and really develop the offering there, exactly to what people of this market want..

Got it, great. And then just last one for me. Since you did mention the brand new responsive website, I always press you for incremental metrics, but maybe if you can give us any learnings that you had so far.

How users are using the website? If it increase -- if you're seeing increases in time on site? Is there anything you can give us around sort of the benefits that you're seeing thus far from your re-platforming efforts?.

The biggest feedback we've received is that members and also our advertisers really love the new site the way it looks. Everyone loves the search function but the one thing we heard back is that members and users also want to browse a little more, so that's what we are adding on the site.

We are making it easier to browse, we're adding more browseability. And based on what we've tasted so far, it seems like that our members and other users of the site are responding to this..

Our next question comes from Ed Woo with Ascendiant capital..

I had a clarifying question, you mentioned that you hopefully will get back to revenue growth by Q4 and Q1, does that also include operating income growth?.

Sure, that's what we would like to see. What we've seen in the past is actually that our expenses in many -- over the last 3 years our expenses actually decreased even more than the way revenues developed, so last year we saw quite a significant increase in operating income.

This year, particularly in the quarter like this, which was really not the greatest as we've pointed out, we still maintain profitability so as soon as revenues swing back into growth more, yes, we absolutely want this to -- want to see this translated into higher in -- operating income.

Maybe not in year, in the first or second quarter but after that for sure..

You mentioned that you're going to be making additional investments in China that you said and [indiscernible] impact, and we're also going to continue to make investments in marketing overall.

Is that incremental from what you've been doing before? Or is it just a continuation of just trying to get that customer list higher?.

Glen, do you want to take that, please?.

Yes, it's a year-over-year that we are referring to on that.

Ed?.

Okay.

So you'll be making more investment overall as well as -- because your app is relatively new because I don't think you caught out China specifically before right?.

No, we have. We've been doing investment in that area cautiously, right? Because it's in -- Asia is in investment mode, right? And so we see a lot of opportunity in China. And both on the product side and at the marketing. I think, there's some room to invest there..

Yes, you're down a little bit that, because we really felt -- basically, the feedback we got from China was that we would -- they really would like more enhanced app experience, and apps are very important in China. So as well as participation in the social networks there.

Now we have a new app coming out, an updated app that was built particularly with China in mind. We now also have developers and product development people in China. That it's important to not only develop product based on the U.S. only. And that was sort of a requirement to become a bit more aggressive again in China.

So yes, we're looking for -- we're certainly looking for growth in China. That was the main reason we brought this business back into our entire family..

Great. And then on our general overall macro update.

I know you traveled in Europe earlier, but what's your sense of how there's a summer travelling doing in both overall in Asia, Europe and North America?.

I think we are happy in North America, and we're also with the opportunity in Asia Pacific. Asia Pacific which was handicapped by a certain lack of staff that we have become to -- come to replace. So we have 2 new general managers in Hong Kong and Australia, that's great.

The area that really -- where the environment isn't working in our favor right now is Europe. And that's why we're seeing -- that's why we're seeing some of these declines in Europe. It's not really the team or business or anything, it's just that we were not able to promote as many offers as we could that in Europe.

And we are company who really thinks in the long-term, if we start sending our members offers that are really not that well or that are not that good or offers that we would not book ourselves, over time they would not trust us as much.

What we have found is the members we've had for a long time tell us, "Well, I know when I get an offer from Travelzoo, it's great, it's fantastic, I can trust it, I know it's a good hotel." And that's very critical. And that's honestly more important for us than pushing and pushing and pushing and promoting and advertising every offer.

So that's really what impacted us in Europe a bit last quarter and this quarter. But I think we have a plan in place to address this with some of the things I talked about earlier. So we're optimistic that we can resume growth there as well, maybe not next quarter, maybe it's going to take, as I said, 6 to 12 months.

But I'm quite optimistic with regards to Europe. And overall, it's great travel is -- travel really has become the new luxury product. When you talk to the new generation, people are not talking anymore about what shoes they're wearing, what jewelry they have been buying.

And product business is driven by social -- by the social media that -- people want to talk about where they are, they want to sent pictures of themselves being on the beach, they want to make their friends jealous. So actually we're very lucky to be in a market, industry that is growing.

So a lot -- the other travel companies are reporting this today or in the next few weeks. And I think overall, what we will see is that this is a very, very exciting industry to be in. Because one thing that you can be sure of is in 10 or 20 years more people will travel than today. And there's not a lot of industries that you can say that about..

Ladies and gentlemen, that concludes the Q&A portion of this conference. I'd now like to turn the conference back over to Holger Bartel..

Thank you, everyone, for joining us today and we look forward to speaking with again you next quarter. Bye, bye, have a great day..

Thank you, ladies and gentlemen, this concludes today's teleconference. You may disconnect and have a pleasant day..