Investments In Fly.com Will Fuel Travelzoo’s Growth

While Travelzoo (NASDAQ:TZOO) managed to post a small sequential gain in revenue in Q2 2012 amid the adverse macro environment, its Q3 results were disappointing with 8% decline in revenue and 42% y-o-y decline in net income. Apart from macro headwinds, lower revenue from Supersearch and Local Deals contributed to the revenue decline, whereas the continued investments into team expansion and enhancement of product portfolio put downward pressure on profits. (Read Our Earnings Article: Travelzoo’s Earnings Fall On Macro Headwinds And Big Investments)

While there are certain factors such as the challenging economic scenario, airline consolidation and increasing expenses, which could dampen Travelzoo’s short-term growth, we maintain a positive outlook for its long-term growth prospects. With growing strength in its hotel business, a robust increase in mobile traffic and social media integration, we believe that Travelzoo is in a good position to leverage future growth in the online travel industry.

We believe that both Local Deals and travel searches will be important revenue drivers for the company. Though we forecast a continuous decline in searches via Supersearch, we estimate the searches on Fly.com to register y-o-y growth for the rest of our review period.

See our full analysis of Travelzoo

Diverting Marketing Spend Away From Supersearch.com

Travelzoo’s search division includes revenues from both Fly.com, a travel search engine, and Supersearch, a pay-per-click travel search tool. While the company registered an increase in searches via Fly.com, the number of searches on Supersearch has declined over the years as Travelzoo diverts its marketing spend away from Supersearch and towards Fly.com.

Fly.com is the main focus of the company with regards to its search business and an important part of its growth strategy. The company is taking a strong interest in the product and incurring heavy marketing spend on the same. In the last fiscal year, about 18% of increased sales and marketing expenses were allocated to Fly.com.

While Travelzoo is looking towards a strategic review of its Supersearch product to stabilize the decline in the number of searches, it is also investing heavily in further developing the Fly.com platform which it claims to be superior in technology compared to Supersearch.com.

Launch Of Hotel Searches To Power Search Volumes Growth For Fly.com

Until recently, Fly.com was only an airfare search engine enabling users to find and compare flight options and real-time fares from hundreds of airlines and major travel websites. In November 2011, Travelzoo officially launched a hotel and car rental search functionality on Fly.com. After entering the search criteria, results can be filtered in several different ways to best fit travelers’ needs which include pricing, star-rating, location, amenities and type of property (resort, hotel, B&B or even hostel).

Unlike air ticket bookings, hotel reservations require travelers to conduct extensive search for best fares. The comparison of fares available over different online travel agencies becomes very important and this is where Fly.com offers value to users in terms of convenience.

Synergy With Core Travel Business To Fuel Traffic At Fly.com

Travelzoo recognizes Fly.com as a meta-search opportunity with attractive economics and great synergies with Travelzoo’s core travel business such as the Top 20 newsletter. The company sees particular opportunity in cross promoting deal content between Travelzoo and Fly.com and at the same time aiding in making the deal content better. Additionally, Travelzoo has started placing Fly.com widgets on its websites in an effort to boost traffic on Fly.com by leveraging its user base.

Expanding Mobile User Base To Fuel Fly.com Searches

Travelzoo’s mobile application downloads registered a 30% q-o-q increase in Q3 2012, and the company claims that it received around 28% of its traffic via mobile devices, up from 12% a year ago. Enhancing and developing new mobile applications and focus on improving conversion rates on the mobile platform remain some of the key strategic areas that Travelzoo is focusing on.

While Supersearch continues to be very popular with OTAs because it delivers extremely efficient bookings, the company claims that the product is relatively time consuming for users compared to newer comparison models and is not so well-suited for mobile. We believe that Fly.com is better positioned to leverage growth in the mobile user base, which in turn can lead to higher search queries for Travelzoo.

Our price estimate for Travelzo0 to $23.80 is at a premium of over 30% to the current market price.

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