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Travelzoo Inc (TZOO -0.18%)
Q2 2019 Earnings Call
Jul 24, 2019, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Hello, everyone. Welcome to the Travelzoo Second Quarter 2019 Financial Results Conference Call. All participants have been placed in a listen-only mode. And the floor will be open for questions following the presentation. Today's call is being recorded. The Company would like to remind you about 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 this conference call will be made available on the Travelzoo Investor Relations website at travelzoo.com/ir.
Now it's my pleasure to turn the floor over to Travelzoo's Global Chief Executive Officer, Holger Bartel, and the Company's Chief Financial Officer, Wayne Lee. Wayne will start with an overview of the second quarter 2019 financial results.
Wayne Lee -- Chief Financial Officer
Thank you, Sonia, 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 number 3 provides the financial highlights for the quarter.
Travelzoo's revenue for the quarter was $28.2 million, up $109,000 year-over-year in nominal terms, and up 3% in constant currencies. Our diluted earnings per share for the quarter was $0.11, a year-over-year increase of $0.07. Our global number of members was 30.2 million, up 400,000 year-over-year, and our social media followers and mobile app downloads continued to grow.
Slide 4 details our revenue by segment. Revenue in North America was $17.9 million, representing a year-over-year increase of 2% in nominal terms, and an increase of 3% year-over-year in local currency. Revenue in Europe was $8.7 million, representing a year-over-year increase of 2% in nominal terms and an increase of 8% year-over-year in local currency. Revenue in Asia Pacific decreased year-over-year from $2.1 million to $1.6 million, which is 23% lower in nominal terms and 20% lower in local currency.
On Slide 5, we would like to highlight the positive 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 17%. Earnings per share after tax from North America and Europe were at $1.06. 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 $17.9 million. Revenues from our travel products increased 5% year-over-year to $15.3 million. Our local revenue decreased 8% year-over-year to $2.7 million.
Turning to Slide 7. Europe revenue increased from $8.5 million to $8.7 million, but in constant currencies, revenue would have been $9.2 million. In constant currencies, our travel products grew 8% year-over-year as a result of an increase in revenue from our new vacations offering that combine hotel deals with flights. And our local revenue also increased 8% year-over-year.
On Slide 8, Asia Pacific revenue was $1.6 million, down from $2 million in the prior year period. The segment was affected as we made some changes to management and we expect improvements over the next few quarters. Slide 9 provides a breakdown of our operating income. North America generated profits of $3.6 million and Europe generated profits of $600,000. The combined operating income of $4.2 million was partially offset by Asia Pacific's operating loss of $1.8 million, resulting in total segment operating profit of $2.4 million.
Income taxes were $1 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 to $2.4 million, resulting in $1.3 million of net income, an increase of 178% year-over-year.
Slide 10 shows the cost of revenue and operating margin. Cost of revenue as a percent of revenue decreased to 9.8%. Our Companywide operating margin increased from 3.8% to 8.6% 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 both 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 increased compared to the prior year. Moving to Slide 13. We continue to use our solid cash position for stock repurchases and ended the quarter with cash of $14.1 million.
Turning to Slide 14. Revenue growth improved in North America and Europe, but we are not yet at our 10% target. Operating margins in our core North America and Europe businesses were at 16% and our operating profits and net income more than doubled. 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 vacations package offering from Europe into other countries, particularly the US, we expect North America revenue to increase as well. We plan to maintain our investments in Asia Pacific, but are aiming to reduce losses in this segment. Overall, as revenues grow, we are also aiming to increase operating margins in 2019 versus last year.
Now Holger will provide you an update on our business in Asia Pacific and 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.
Holger Bartel -- Global Chief Executive Officer
Thank you, Wayne. With regard to Travelzoo's investment in Asia Pacific, our board and management are strongly committed to drive up shareholder value. We are moving quickly and decisively. During the second quarter, we installed a new management team. This resulted in some turnover in staff. We expect this transition phase to be short. We hired a top management consulting firm in China to conduct a strategic review of the business. We expect the first strategic decisions to be made in the next four weeks.
As explained today in our press release, Travelzoo's business in Europe and North America and in Asia Pacific are very different -- are in very different situations. The first is a core business with steady, strong profitability. The second is a development business. When we report financial results on a consolidated basis, we feel that the different situations and the financial performance of our core business versus our development business is not well understood. This is why we added additional information in today's communications.
In Europe and in North America, our focus is on the continued rollout of our expanded vacations offering and as always better execution. We believe that there are still many opportunities to generate more revenue and profits from Travelzoo's large number of members in Europe and North America. Many of these members love Travelzoo and the irresistible deals we publish with the highest quality standards. When analyzing purchasing activities of our members when possible, we see Travelzoo members are spontaneous and spend well above average at the visited destination.
The global tourism industry is increasingly talking and becoming worried about overcrowding of destinations. Overcrowding of destinations means that too many tourists are traveling 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. This is exactly what Travelzoo has always been specializing in. It is just becoming more relevant.
Now back to the operator.
Questions and Answers:
Operator
The floor is now open for question. [Operator Instructions] Our first question comes from Ed Woo of Ascendiant Capital. Your line is now open.
Ed Woo -- Ascendiant Capital Markets -- Analyst
Yeah. Congratulations on the quarter. My question is on just the overall travel industry. What are you seeing out there? I know we're just in the middle of our summer right now, but it seems as if travel industry remains pretty healthy.
Holger Bartel -- Global Chief Executive Officer
Yes. Hi, Ed. We continue to see growing demand for travel globally. And in recent years, travel has become one of the most important -- well, maybe the top lifestyle category. At the same time, as I said, we see a challenge of overcrowding in some of the top destinations. This is where we believe our prime positioning and business model will help tremendously. So overcrowding happens when local supply capacity cannot meet the spike in demand within a short period of time. And what Travelzoo does best is to influence and direct demand to a different destination or to a different timing. This will provide a big help to ease the pressure of overcrowding.
And then, as I said, our product and particularly some of the new products that we have launched recently, such as the vacations offering, will help address this challenge. Vacation offering -- the vacation offering is enabling members to make more sensible and wise decisions on when and where they can travel. With this tool, first our members have the option to explore more new destinations that were not accessible to them in the past. And secondly, that will give to members the flexibility to plan their visiting time to a certain destination. So members can choose, for example, travel period when it's less crowded or they can avoid a time of the year when there's too many tourists, which allows them to avoid less-satisfying travel experiences.
Ed Woo -- Ascendiant Capital Markets -- Analyst
Great. Has there been any change in the competitive environment? Or has it been pretty stable?
Holger Bartel -- Global Chief Executive Officer
It's been now a couple of years, Ed, some major acquisitions happened in 2016 and 2017. However, we would say the competitive landscape today is rather steady in 2019.
Ed Woo -- Ascendiant Capital Markets -- Analyst
Great. And my last question is, have you noticed any change in suppliers' goal of taking their supply in-house where I know there's always been a conversation of hotels being more direct? Or have you seen any changes with the alternative accommodations how that may or may not impact your business?
Holger Bartel -- Global Chief Executive Officer
Not so much. And I want to say that suppliers like to work with us. First, we bring them bookings directly, which is what they prefer. And second, we are an independent company who puts our members first. This allows us to build robust understanding of how to produce the best travel deals to stimulate demand among members, and that's what suppliers appreciate. They appreciate this type of knowledge and understanding. And third, Travelzoo members are characterized by suppliers as high-quality customers. They're affluent, they are spontaneous, they tend to upgrade, they spend money at the hotels. So our members are well-educated and open-minded in viewing things. Therefore, when we travel -- when they travel to different destinations or hotels, they usually respect and appreciate the local culture and rule, and that's what our suppliers welcome really a lot.
With regards to alternative accommodations, this really hasn't affected our business for Travelzoo. Our strength is to destimulate demand and to drive business to place and destinations that are not yet busy, or they are in a busy season or because the destination hasn't been discovered by travelers yet. So far, the alternative accommodation don't play a big role for us. And we are not anticipating any major changes in the future. But we are working on a couple of partnerships with hand-selected vacation rental suppliers to provide more, various and interesting travel solutions for our members when they experience the world.
Ed Woo -- Ascendiant Capital Markets -- Analyst
Great. Well, thank you for answering my questions and best of luck. Thank you.
Holger Bartel -- Global Chief Executive Officer
Thank you, too. Bye-bye.
Operator
Okay. I'll turn back now to Mr. Holger Bartel.
Holger Bartel -- Global Chief Executive Officer
Ladies and gentlemen, thank you again for joining us today. Thanks for your time and support. And we look forward to speaking with you again next quarter. Have a nice day.
Operator
[Operator Closing Remarks]
Duration: 16 minutes
Call participants:
Wayne Lee -- Chief Financial Officer
Holger Bartel -- Global Chief Executive Officer
Ed Woo -- Ascendiant Capital Markets -- Analyst
