Travelzoo’s Mobile Traffic And Getaway Deals Lift Growth

Travelzoo (NASDAQ:TZOO), a leading Internet media company, posted 7% annual increase in its Q1 2013 revenues as it witnessed higher spending by vacation packagers, cruise advertisers and growth in getaway hotel deals, both in North America and Europe. However, overall local deals and search revenue declined by 3% and 10% y-o-y, respectively, due to a decline in the number of deal vouchers sold and a lower number of revenue generating clicks.

While rising expense on subscriber marketing, sales force expansion, new product development, and social media and mobile integration has impacted profit margins in recent quarters, we believe such investments are necessary to drive long term growth. With growing mobile traffic and a stronger hotel business driven by getaway hotel offering, we feel Travelzoo is in a good position to leverage future growth in the online travel industry.

Travelzoo is slated to release its Q2 2013 results on July 18, and we expect earnings to continue the growth momentum build up in Q1 2013, with a slight decline in profit margin.

See our full analysis of Travelzoo

Growth In Mobile Traffic

Given the nature of its products, the company has seen an increase in the audience accessing its services through mobile devices. Travelzoo registered a significant increase in mobile traffic, which grew to 35% (of the total traffic) in Q1 2013, from 20% in the same quarter last year. Additionally, downloads for its mobile iPhone and Android apps experienced a more than 300% jump y-o-y, reaching 1.6 million.

Mobile is one of the primary reasons Travelzoo has identified for building its new hotel platform. Presently, a mobile user trying to book a hotel through Travelzoo is redirected to the hotels booking engine, which may not be compatible with the user’s mobile device. The new hotel booking platform will address this issue by providing easier search and booking facility on Travelzoo’s website itself.

Travelzoo has begun shifting its development focus to mobile and intends to transform to a mobile-first product development organization this year, as it expects its app downloads and mobile traffic to increase considerably in the future.

Local Deals Business Remain An Attractive Business Opportunity

Revenue from the local deals business declined by 3% y-o-y in Q1 2013 . While revenue from the business grew marginally (<1%) in Europe, it dropped by 4% y-o-y in North America due to lower number of local deals vouchers sold.

Since the launch of the business in 2010, competition for Travelzoo has grown due to low entry barriers in the market. However, the company is differentiating itself from group-buying sites such as Groupon by leveraging its existing relationships with hotels and customer base from publishing forums, and by targeting more affluent customers who have an appetite for higher-end deals. Travelzoo also launched Getaway hotel offerings in 2011, under which promotional deals are offered to consumers based on a voucher selling model. Since Getaway is gaining popularity among medium and small size hotels, the company is taking steps to increase its sales force.

We believe greater focus on high quality deals and affluent customers, and increased investments in building a strong sales force that will drive future growth in Travelzoo’s local deals business. Although local deals presents a growth opportunity for the company, low barriers to entry in the market are likely to attract more competition in the long run. Going forward, we forecast average revenue earned per deal and deal take rates for Travelzoo to decline. If the degree of competition in the industry rises more than expected, it could prove detrimental to the average revenue earned per deal and deal take rates for the company, leading to a decline in revenue from the business.

Higher Operating Expenses To Drive Future Growth

Rising competition has compelled Travelzoo to increase its investments on subscriber marketing, sales force expansion, new product development, social media and mobile integration, in order to retain and add new subscribers. These investments have impacted the company’s bottom line in recent quarters, including Q1 2013. At just about 19% for the period, its EBITDA margin was significantly lower than its historical average.

Travelzoo anticipated these costs to increase further in Q2 2013 and expected an additional investment of $900,000 due to rising headcount costs, increased subscriber marketing, legal and professional fees, and development costs for the hotel booking platform it plans to launch later this year.

Although such investments restrict growth in the short term, we believe these will drive long term growth for Travelzoo, by expanding subscriber base and attracting a greater number of publishers to its website. Going forward, we expect lower expenses, and as Travelzoo plans to focus on growth and improved productivity, we estimate margins to stabilize in the long run.

Our price estimate of $23.32 for Travelzo0 is at a discount of about 20% to the current market price.

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