Can Europe Save Travelzoo?

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Europe has been kind to the travel portals. Timely acquisitions, overseas e-commerce migration, and resilient currencies have made the European arms of leading travel sites like Expedia (Nasdaq: EXPE), Priceline (Nasdaq: PCLN), and Orbitz Worldwide (NYSE: OWW) key drivers of growth.

Now travel publisher Travelzoo (Nasdaq: TZOO) wants in on the fun. Oh, if only it were that easy.

The company behind the Top 20 list of weekly travel deals issued a press release this morning that sounded upbeat at first.

• "7 Million Internet Users Visit Travelzoo's European Websites," reads the headline.
• "UK, German and French Websites Enjoy Record Traffic levels in First Quarter," reads the sub-headline.
• The opening paragraph leans on Google Analytics data, showing Travelzoo's European traffic grew to 7.1 million during the quarter, well ahead of the more than 3 million it claimed during the same three months a year ago.

If it sounds too good to be true, well, it is. Keep in mind that 1.4 million of those visitors came to the company's French site, which opened just three months ago. Another 1.3 million of those 7.1 million users checked in from Germany, a site that was launched just five months ago.

In other words, the German and French websites scored "record traffic levels" during the period because it was their only complete quarter in business. And because neither site was around when Google's (Nasdaq: GOOG) tracking program was keeping tabs on Travelzoo's operations in Europe during the first quarter of 2007, what's the point in telling us that traffic has more than doubled over the past year without immediately qualifying that by explaining that it's doing so with three times the number of websites?

On an apples-to-apples basis, Travelzoo is clearly growing in Europe. The company's United Kingdom website attracted 4.4 million visitors during the quarter. That's a respectable advance from the more than 3 million travel-deal-seeking locals it attracted a year ago. Travelzoo also shows that nearly a third of its traffic is coming from type-in traffic. That is huge news in that it means cheaper customer acquisition costs for Travelzoo, as well as healthy brand awareness.

So what's with Travelzoo's smoke and mirrors here when it still has a good story to tell? It could be that investors haven't been served well by Travelzoo's foreign forays lately.   

Travelzoo's stock was slammed two months ago, when the company reported that it barely broke even for its fourth quarter. The problem was that its effective income tax rate clocked in at a whopping 98.3%. And you thought your tax bite was bad?

The reason for the hefty bill is that losses widened in Asia and Europe, and those losses can't be used to offset domestic taxable gains. This morning's press release may be encouraging on the traffic front, but will it spill over into actual profitability overseas soon?

That is what we're waiting for. That is what is holding the company back, unlike more successful niche-specific lead-generating portals Bankrate (Nasdaq: RATE) for financial products and InsWeb (Nasdaq: INSW) for insurance. Those companies are growing their top lines (while Travelzoo is retreating domestically) and their bottom lines (where Travelzoo is falling behind globally).

The Travelzoo brand and potential are compelling. Now let's see the company roll up its sleeves and deliver real growth without the trickery.

Book this Foolishness:

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