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

Daniel Kurnos - The Benchmark Company.

Good morning, everyone, and welcome to the Travelzoo Third Quarter 2017 Financial Results Conference Call. [Operator Instructions]. 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 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 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 refer to 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 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 is my pleasure to turn the floor over to your host, Mr. Holger Bartel, Travelzoo's Global CEO. Thank you. You may begin, sir..

Thank you, Operator. Good morning, and thank you for joining us today for Travelzoo's Third Quarter 2017 Financial Results Conference Call. I am 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 third 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 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 $24.7 million, down 8% year-over-year or down 9% in constant currencies.

Our diluted earnings per share from continuing operations this quarter was a $0.05 loss, down year-over-year, driven by the lower revenues and a larger loss in Asia. Our members grew to 29.5 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 $15 million, representing a year-over-year decrease of 5%, which is better than last quarter. Revenue in Europe was $7.9 million, representing a year-over-year constant currency decrease of 9%. And revenue in Asia Pacific was $1.8 million, representing a year-over-year constant currency decrease of 28%.

The next few slides cover further detail of our revenue for each of our 3 segments. Slide 5 shows North America year-over-year revenue of $15 million.

Revenues from our core products, Top 20, our new responsive website and from our hotel platform increased year-over-year, yet this was offset by the pullback from our Getaway voucher sales, as we focused more on our hotel platform. Revenues from our local products shrank by the least amount in over 2 years.

Revenues were also impacted by the 2 large hurricanes hitting the Caribbean and parts of the U.S. during the quarter. Turning to Slide 6. Europe revenue was $7.9 million, lower than a year ago, which continued to be affected by a challenging season in industry for sourcing deals and offers in the region.

On Slide 7, Asia Pacific revenues were much lower than expected, as it is taking more time to scale up our sales team, as we lost revenue from a large bankrupt customer in Japan. Yet in Hong Kong and Australia, where we hired new general managers, we saw revenues grow year-over-year. Slide 8 provide the breakdown of our operating income.

We were breakeven on overall operating income. North America generated increased profitability of $1.4 million in the quarter, while Europe generated $300,000 of operating income. Asia Pacific recorded an operating loss of $1.7 million. In spite of the small operating profit, income taxes of $680,000 drove us to negative net income.

This unusual effective tax rate is due to the geographic distribution of our income, with losses from Asia Pacific not having any tax benefit. Slide 9 shows the cost of revenue and operating margin. The cost of revenue as a percent of revenue improved by 1 point to approximately 12%.

The operating margin decreased due to the continued investments in Asia. Slide 10 presents our operating expenses by segment. Overall, operating expenses remained flat, with North America doing better, offset by slight cost increases in Europe and Asia. Slide 11 shows that our productivity was down, driven by seasonality.

We also made some investments in new hires, with increased headcount versus prior quarter. Moving onto Slide 12. DSO improved, driven by the runoff of a longer collection cycle customer that was related to our discontinued SuperSearch and Fly.com products.

Operating cash flow was positive, which was offset by our continued stock repurchases, which totaled $2.7 million. We exited the quarter with a solid cash position of $18.8 million, of which $11.4 million was held outside the U.S. Turning to Slide 13.

In summary, the financial performance remains positive in North America, particularly in our core travel products. However, Asia Pacific generated operating losses. Our operating costs have remained flat by investing our savings into Asia and our product and marketing.

In addition, we have maintained a solid cash position despite continued stock repurchases. Looking forward, we expect the following, for the fourth quarter, we expect similar year-over-year changes in revenue, as we have experienced over the last several quarters.

However, we're aiming to return to revenue growth in 2018, mainly driven by an increase in revenue from expanded offerings in our travel products.

We are planning to maintain the increased member acquisition and member marketing spend, and we plan to maintain our investments in Asia Pacific, and particularly in China, which will reduce year-over-year EPS by approximately $0.05. We expect additional $600,000 of expenses during the quarter compared to Q3 for certain nonrecurring expenses.

So in summary, given these trends in investments, we still expect lower revenues and operating income year-over-year in the short term, but Holger will provide you an update on 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 noninvestment area cost and our focused on increasing the productivity of our resources.

We believe the steps we are taking, including our focus of all resources on our 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 does have positive long-term growth prospects.

This concludes the financial summary of our third quarter of 2017. Now Holger will provide you an update on Travelzoo's business initiatives aimed to drive growth..

Let me start off by saying that we are pleased with the positive trends continuing in North America, which would have looked much better if we didn't have all these weather events in - the hurricanes and Napa Valley and the - just a lot going on in the third quarter.

Although we have not yet reached a year-on-year revenue growth that we would like to achieve, but on the other hand there's clearly more work to be done in Asia Pacific.

We regard this as a longer-term attractive opportunity, and we plan to continue to improve both product offering and management there to help improve our members' experience and our financial results.

So on Slide 15 I would like to talk about some of the business initiatives that are underway, which we believe will return us to growth mode in the next 6 to 12 months. First, we are expanding our offerings. Being a Travelzoo member is great, but we want to make Travelzoo membership even more attractive.

So we are working to add exclusive benefits and member perks. We also know that exclusive offers drive sales and bookings. Bookings from our hotel platform continue to grow, yet we want to accelerate that pace of growth. So we are adding more exclusive rates and offers, which we have found to dramatically increase conversion rates.

We've also started to break down the country silos in which our offers reside today, and our hotel platform for deals and special offers for our members is now fully globalized. Members worldwide now have access to any offer that we have negotiated from 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. Several partnerships are already underway, but we are 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 are particularly interested in a specific offer or destination, and we are starting to implement a technology platform which will create a more personalized product experience for our members and, importantly, also allow us to reach them beyond our traditional e-mail format.

We just launched an updated app, with China being the initial market, as we see a great app experience there as critical to success 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 members.

We've also begun to lay the groundwork for our loyalty program, with the goal of motivating our members to shift their usage to Travelzoo and to use us more frequently.

All these activities will not change financial performance immediately, but we believe 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, again 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 resume top line growth, but in a smart way. Some investments are needed, but we would like to maintain profitability. This concludes our prepared remarks.

So now back to the operator..

[Operator Instructions]. Your first question comes from the line of Dan Kurnos from Benchmark..

Great. Let's just start from the top down. Holger, just on sub count. I know you guys have been reinvesting a lot of dollars and going after high-value subs, and we're not really going to see a major acceleration just because, obviously, there's some natural e-mail churn involved there.

We are still seeing growth in Europe, and have seen sort of a little bit of a tepid growth in Asia. So just can you tell us how you're thinking about, you know, which market you're kind of deploying more capital to? Understanding that you'd like to ramp the Asia business, but that's taking a little bit longer time.

And just how we should think about, once we get through this year - as we look in the next year calling for this return to growth, how we should think about sub growth contributing to that factor versus increase of wallet share?.

Yes, you're right. Right now, we do the most in Europe. In the other markets, not quite as much. And I just spoke about that new technology platform that we are implementing to better understand what our members are doing, usage data. It's a technology we'll be implementing over the next 6 months.

And one of the key benefits actually is in the area of member acquisition because we will learn what our members are doing, what type of members, what type of geographics, what type of demographics are going after certain offers. And until this is in place, we are slow down a little bit in North America with new member acquisition..

Got it. Okay, that's helpful. And then, just on the local business. North America actually had - I mean, it was down, but it wasn't down. You just sort of stemmed the declines. I know you called sort of a better - the best result, I think, in like sort of 2 years.

I'm just curious, how much of that is from frankly, Getaways just being a smaller portion of the underlying number versus how much of it is coming from actually turning of the tide, if you will, in package sales?.

Getaways is actually not part of that. Getaways are in the travel line. In local, it's really local offers from restaurants, bars and entertainment. It's also a part of that. And yes, the team in North America did better this quarter. So we're quite encouraged by that.

But also want to say, our main focus to drive revenue is in the next few quarters and get back to that year-over-year revenue growth that I would like to achieve next year. Our main focus there and the main source for that will be in the travel products area, particularly in the areas like hotels, vacation packages.

I feel that revenues in Getaways - and Glen can - happily commented as well, have now declined, can be replaced by hotel platform revenue at a level where - I don't see that going down that much more.

But our results in North America then would have looked much, much better, and we're actually quite excited at the beginning of the quarter if we didn't have these weather events.

Because, as you can imagine, if - several islands on the Caribbean are destroyed, and people cannot fly to even Florida or to the south or to Texas, or people cannot fly from Texas and thousands of flights being canceled. That really hit us, because offers that were planned to run in September, just had to be pulled.

And so we definitely lost some advertising revenue there. Otherwise, as I said, North America would've looked much better. And overall, it's been encouraging there. Asia on the other hand, as I said, was a bit disappointing. Just taking longer to fill all the positions that we want to fill.

But on a good note, where we are able to do that, like in Hong Kong - we appointed earlier this year, a new General Manager in Australia. We have appointed a new General Manager, and in both countries now, we are seeing year-over-year revenue growth - actually you shouldn't call Hong Kong a country.

So rather in the region - the territory of Hong Kong. So that's encouraging. So I think we will do better there once we are able to improve the talent and management situation there..

I don't know if - how relevant this is, but just in terms of what you focused on the travel product. Obviously, a lot has been made from the larger players and the alternate lodging space. I know it's a little bit different set of assets or opportunities, North America versus Europe.

But, I mean, do you have any thoughts on getting - penetrated more into that channel? Or is that - is it still, "Hey, we've got a hotel opportunity." More traditionally, if would include B and Bs as traditional hotel offerings that we'd like to focus on?.

Not an area of focus for us. At least not yet..

I will now turn the call back to Mr. Holger Bartel..

Thank you, again, ladies and gentlemen, for your time and support, and we look forward to speaking with you again next quarter. Bye..

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