How do you attract 2 million people in Europe without staging a World Cup soccer match? If you're Travelzoo (Nasdaq: TZOO), you get there by launching country-specific websites built around your flagship weekly emails that offer travel deals.
Travelzoo announced this morning that it has passed the 2 million-member mark in Europe. That means it has doubled its base of travel-hungry Europeans over the past year. More than half are in the United Kingdom, and the balance is spread out among the other places where the site's mailings go -- France, Germany, and Spain.
The European invasion hasn't come cheap, considering that the company has posted quarterly losses in its international business for several quarters now. Since tax losses overseas can't be used to offset the tax bite on domestic gains, there have been some pretty outlandish income statements on the company's line item for taxes. If you thought an effective tax rate of 98% to close out the final quarter of 2007 was bad, 2008 has been a doozy, with taxes gobbling up 164% and 168% of the pre-tax profits during the first two quarters of 2008, respectively.
Those numbers make the milestone less of a cheering point. Given all of the money that Travelzoo has been losing to grow its business in Europe, it had better be gaining a ton of new eyeballs.
The upside is that Travelzoo is also gaining traction with sponsors. An impressive 1,186 companies have already paid Travelzoo to be considered for its weekly opt-in "Top 20" travel-deals email. We're not talking about small fries, either. Starwood (NYSE: HOT), Hilton, British Airways, and Morgans Hotel (Nasdaq: MHGC) are turning to Travelzoo to reach out to Euro-based travelers.
Travelzoo should hold up well in tricky economic climates as penny-pinching tourists gravitate toward Web deals, while travel providers will want to move their underutilized capacity at any price.
Travelzoo is unique in its approach. It is not an online agent in the mold of Expedia (Nasdaq: EXPE), priceline.com (Nasdaq: PCLN), Orbitz Worldwide (NYSE: OWW), or China's Ctrip.com (Nasdaq: CTRP). It doesn't book travel plans. It's simply a publisher of sponsored deals. This approach may seem to give the company a thin moat, but it's been able to grow quickly to achieve critical mass.
The real challenge now is to turn a profit in Europe and improve margins closer to home. With its shares back in the single digits, the upside is there for the taking. It's nice to have 2 million Europeans on board, but having 2 million profitable Europeans would be even nicer.
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