It's a Zoo Out There

Another quarter, another disappointing report from Travelzoo (Nasdaq: TZOO  ) .

The online travel publisher behind the popular "Top 20" weekly travel deals email once again struggled to turn a profit. Travelzoo posted a loss of $0.13 a share, as revenue fell by 6% to $18.8 million. Wall Street was looking for a deficit of just $0.09 a share on $21.9 million in revenue.

Weakness in its original North American market was the top-line culprit, shrinking revenue by 13% year over year. Stateside operating profits dropped 41% during the same period. North American revenue still accounts for a thick 85% slice of the Travelzoo revenue mix, more than absorbing the huge revenue gains in Europe and Asia Pacific.

The foreign growth comes at a price, though, eating away at all of the $4.2 million in North American operating profits -- and then some.

Travelzoo's past few quarters have looked ridiculous from an effective tax rate perspective. Since it can't use losses abroad to offset domestic taxable gains, it has paid effective tax rates of 98%, 164%, and 168% through the three previous quarters. Things are worse now, since the company posted a net operating loss. However, investors should know that the company's pre-tax loss of $374,000 translates into a deficit of only $0.03 a share.

Travelzoo is getting serious about getting its costs structure in order, especially given its skyrocketing G&A costs. It will slow its spending abroad as it cuts costs closer to home. If the cuts are material, they should help bring Travelzoo back to profitability.

This should be Travelzoo's moment to shine. With more than 12 million people opting in to its travel deal listings, desperate travel providers would love to get their best deals exposed through Travelzoo. There may be competition, like Priceline.com's (Nasdaq: PCLN  ) PriceBreakers list or Southwest's (NYSE: LUV  ) "ding" fare sale desktop alerts, but Travelzoo is still the killer brand.

As a travel publisher, Travelzoo doesn't necessarily compete with conventional online portals like Expedia (Nasdaq: EXPE  ) , Orbitz Worldwide (NYSE: OWW  ) , and Priceline. It only serves to ferret out sponsored travel deals instead of being a full-service booking agent. The model served Travelzoo well with chunky profit margins in the past, but times have changed. Overseas expansion makes sense, but if North American operations can't bankroll the global push, corners must be cut even in a very round world.

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Longtime Fool contributor Rick Munarriz has been inspired by a deal or two on the Travelzoo Top 20 list, but he does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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