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Travelzoo Inc  (NASDAQ:TZOO)
Q1 2019 Earnings Call
April 25, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello everyone. Welcome to Travelzoo, First Quarter 2019 Financial Results Conference Call. All participants have been placed in a listen-only mode and the floor will be opened for questions following the presentation. Today's call is being recorded.

The Company would like to remind you all that, all statements made during this conference call and presented in the slides that are not statements of historical facts constitute forward-looking statements and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Actual results could vary materially from those contained in the forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements are described in the Company's Forms 10-K and 10-Q and other periodic filings with the SEC.

Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Please refer to the Company's website for important information including the Company's earnings press release issued earlier this morning.

An archived recording of the conference will be made available to Travelzoo's Investor Relations website at travelzoo.com/ir.

Now, it is my pleasure to turn the flow over to Travelzoo's Global Chief Executive Officer, Holger Bartel and Travelzoo's Chief Financial Officer, Wayne Lee, who will start with an overview of the first quarter 2019 financial results.

Wayne Lee -- Chief Financial Officer

Thank you, Victor, and welcome to those of you joining us today. Please open the management presentation to follow along with our prepared remarks.

The presentation in PDF format is available on our Investor Relations website. Slide 3 provides the financial highlights for the quarter. Travelzoo's revenue for the quarter was $30.8 million, down $59,000 year-over-year in nominal terms, but up 3% in constant currencies.

Our diluted earnings per share for the quarter was $0.26, a year-over-year increase of $0.06. Our global number of members was 29.9 million, up 200,000 year-over-year. And our social media followers and mobile app downloads continues to grow.

Slide 4 details our revenue by segment. Revenue in North America was flat year-over-year at $18.6 million, but increased by 1% in local currency. Revenue in Europe was $10.6 million, representing a year-over-year increase of 3% in nominal terms and an increase of 10% year-over-year in local currency.

Revenue in Asia Pacific decreased year-over-year from $2 million to $1.7 million, which is 18% lower in nominal terms, but just 13% in local currency.

On Slide 5, we would like to highlight the strong performance in our core businesses in North America and Europe, which is overshadowed by our investments in Asia Pacific.

Revenues, operating income and EPS are growing and operating margins in these businesses are running at an annual rate of 16%. Earnings per share after tax from North America and Europe were at $0.96. At the level of the Group, the operating losses in Asia Pacific result in much smaller profits and margins.

Furthermore, losses in Asia Pacific cannot be used to offset taxes in North America and Europe. This results in a high effective tax rate on corporate earnings, which would decrease as losses in Asia Pacific shrink.

The next few slides cover further detail of our revenue for each of our three segments. Slide 6 shows North America revenue of $18.6 million. Revenues from our travel products increased to 2% year-over-year. Our local revenue decreased from $2.5 million to $2.3 million.

Turning to Slide 7, Europe revenue increased from $10.3 million to $10.6 million. In constant currencies, our travel products grew 13% year-over-year, as a result of an increase in revenue from our new vacation offerings that combine hotel deals with flights.

On Slide 8, Asia Pacific revenue was $1.7 million, down from $2 million in the prior year period, due in part to turnover in our sales team and phase out of local offers in markets that are too small. Slide 9 provides a breakdown of our operating income. North America generated profits of $4.5 million and Europe generated profits of $2.1 million.

This combined operating income of $6.6 million was partially offset by Asia Pacific's operating loss of $1.6 million, resulting in total segment operating profit of $5 million.

Income taxes were $1.8 million, which represents tax on North America and Europe profitability, with no tax benefit from Asia losses, given these are in separate tax jurisdictions. Operating income improved year-over-year by $1.3 million, resulting in $3.1 million of net income.

Slide 10 shows the cost of revenue and operating margin. Costs of revenue as percentage of revenue decreased to 9.6%. Our Company wide operating margin increased from 11.8% to 16.1%, as a result of lower cost of revenue and lower operating expenses.

Slide 11 presents our operating expenses by segment. Operating expenses as a percent of revenue decreased in North America and Europe. Operating expenses in Asia Pacific decreased year-over-year, but as a percentage of revenue increased due to lower revenues.

Slide 12 shows that our productivity continues to improve over time. Moving to Slide 13, we continue to use our solid cash position for stock repurchases and ended the quarter with cash of $19.9 million, up from $18 million at the end of Q4 2018.

Turning to Slide 14. In constant currency, year-over-year revenue grew at 3% with Europe posting double-digit growth. We saw our highest operating profit and operating margin in over four years, even with our continued investment in Asia Pacific and our products.

Finally, we have maintained our solid cash position, enabling us to repurchase our stock. Looking forward, we expect the following. We expect year-over-year revenue growth to accelerate with Europe continuing to grow revenues in local currency at a double-digit rate.

As we extend our vacation package offerings from Europe into other countries particularly the US, we expect North America revenue to increase as well. We plan to maintain our investment in Asia Pacific, but are aiming to reduce losses in this segment. Overall, as revenues grow, we're also aiming to increase operating margins in 2019 versus last year.

Now Holger will provide you an update on why we believe Travelzoo's global brand and service will become increasingly relevant for consumers and the tourism industry and provide you an update on our investment in the Asia-Pacific region.

Holger Bartel -- Global Chief Executive Officer

The global tourism industry is increasingly talking and becoming worried about overcrowding of destinations. Overcrowding of destinations means that too many tourists are travelling to the same destinations leading to environmental and social problems. The problem was first covered in 2017 in a report by McKinsey & Company and the World Travel and Tourism Council.

By 2020, the 20 most popular countries will add more international arrivals than the rest of the world combined. Studies show it will become increasingly important for consumers to see alternative choices of destinations, and this is exactly what travelers who has always been specializing in. It is just becoming more relevant.

When promoting destinations with excess inventory, Travelzoo has always managed to provide its members with irresistible offers. Travelers who proposes a sustainable and achievable strategy to help match the demand with the supply by negotiating special offers with hotels, airlines and local businesses for its members to enjoy quality travel at lower prices than when they visit lesser known destinations or explore popular places during off seasons.

Travelzoo who leverages its know-how to set trends, stimulate and direct demand as well as enables members to enjoy destinations in a creative, smart and responsible way.

Lastly, I would like to reiterate a few words about our business in Asia Pacific. Travelzoo is committed to driving up shareholder value by implementing a successful strategy to achieve profitable growth in Asia Pacific faster. Therefore, the Company has launched a project, Asia Pacific 2020 to define a better go-to market approach to build alliances with local partners and to rapidly scale up in an economically smart way to arrive at profitability.

We have appointed Scott Wang, as Head of strategy Asia Pacific and General Manager, Greater China, effective May 22nd, 2019. Scott joins Travelzoo from Wiley, a global publishing Company where he worked for five years as VP, International Development in Asia Pacific and China country head.

Under his leadership, growth of the Company's core business in China was accelerated while a collaborative and entrepreneurial culture was established. In the newly created role of head of strategy Asia-Pacific, Scott is responsible for developing and executing Travelzoo's growth strategy in Asia Pacific to reach profitability.

He will also oversee daily operations of the business in Greater China with profit and loss responsibility, as General Manager, Greater China. In leading the Asia Pacific 2020 project, Scott will be joined by three experienced staff from Travelzoo's Europe and North America operations across key functions.

Travelzoo's Board of Directors and management have made Asia Pacific a priority. We set an ambitious target and firm timeline for creating shareholder value from the Company's investments in this geographic region. Strategic alliances with local partners will be considered.

Now back to the operator. Operator?

Questions and Answers:

Operator

Sorry about that. (Operator Instructions). And our first question comes the line of Ed Woo from Ascendiant Capital. You may begin.

Edward Woo -- Ascendiant Capital -- Analyst

Yes, congratulations on the quarter. My question is more on the travel industry in general. What are you seeing out there in the travel industry and how do you think the summer travel season will play out this year?

Holger Bartel -- Global Chief Executive Officer

Hi, Ed. Look demand for travel continues to grow around the globe and this is driven by an increasing number of consumers who have more time and more available income to spend on travel.

Also in recent years and due to the surge in social media, travel has become one of the most important, if not the most important lifestyle categories. At the same time, as I said we see a trend of overcrowding of destinations. This trend will continue to grow in importance and Travelzoo is well-positioned to help destinations and travel suppliers to better balance supply and demand.

So regarding summer, we see all of these trends coming together, some popular destinations will become even more popular. We will see more overcrowding, but at the same time we drive demand for destinations that are less popular in the summer months.

Edward Woo -- Ascendiant Capital -- Analyst

Great. In terms of, you know, you mentioned the overcrowding. In terms of how much of a problem do you think it's going to be where you may run out of capacity at these proper (ph) destination that it may affect people's ability to travel or do you think that you guys will build (ph) being able to just shift them to other locales?

Holger Bartel -- Global Chief Executive Officer

Well, it's already a problem today and the report from McKinsey and the Tourism Council say that the problem will increase. It's not going to increase and become more important from today to tomorrow. But in the next few years, it will become increasingly a problem.

And our products and particularly some of the newer products that we have launched like our vacation package offering, allow consumers to exactly make the choice to where one to go, to a very expensive destination where everybody is heading, or do I rather want to explore something that is new where people haven't been going so far.

Edward Woo -- Ascendiant Capital -- Analyst

Great. And then moving to a slightly different topic. Alternative accommodation, there has been a rise of Airbnb and the other, you know booking engines are focused on, you know, renting houses and -- and condos and vacation rentals. Has that affected your business and are you going to be able to include that in some of your packages, where you kind of add a lot of strength?

Holger Bartel -- Global Chief Executive Officer

It's not yet, it's important for the large online travel agents to provide as much inventory and as much a bit -- as much opportunity for people to stay as possible. That's part of their strategy.

For us, the strategy is really more to stimulate demand, to drive demand and drive business into places and destinations that are not busy. So far, the alternative accommodations don't play a big role for us, but I would assume this will increase over the next few years.

Edward Woo -- Ascendiant Capital -- Analyst

Great. And my last question is just on the issue going on with the Boeing 737 MAX. Has there been any impact on business at all on that?

Holger Bartel -- Global Chief Executive Officer

No. We have not seen anything in that respect.

Edward Woo -- Ascendiant Capital -- Analyst

Great. Well, thank you and good luck.

Holger Bartel -- Global Chief Executive Officer

Same to you. Thanks.

Operator

Okay, I'll turn it back now to Mr. Holger Bartel.

Holger Bartel -- Global Chief Executive Officer

Thank you everyone, ladies and gentlemen for dialing-in and for your time and support. We look forward to speaking with you again next quarter. Bye.

Operator

Thank you, ladies and gentlemen. This concludes today's teleconference. You may disconnect your lines at this time. Everyone have a nice day.

Duration: 17 minutes

Call participants:

Wayne Lee -- Chief Financial Officer

Holger Bartel -- Global Chief Executive Officer

Edward Woo -- Ascendiant Capital -- Analyst

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