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Same Old Breed at Travelzoo

By Rick Munarriz – Updated Apr 5, 2017 at 5:15PM

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The company behind the weekly "Top 20" travel deals email disappoints in its latest quarter.

Another quarter, another disappointing report out of Travelzoo (NASDAQ:TZOO).

Third-quarter profits for the online travel publisher behind the popular "Top 20" weekly travel deals email were cut in half to $0.14 a share, shy of the $0.18 per share that Wall Street was looking for. The company has now come in short of analyst profit projections in each of the past four quarters. (Review last quarter's earnings here.)

Revenue climbed 13% to $19.9 million, also shy of market expectations.

Yes, income taxes are a factor. The company isn't allowed to use operating losses in foreign markets to offset stateside profits, a problem when Travelzoo is taking hits in those markets to launch similar sites. That left Travelzoo saddled with paying 60% of its pre-tax profits in taxes. It was a lofty, yet not as stubborn, 46% chunk going to the tax man a year earlier.

Travelzoo can't lean on that as much of a crutch, though. Operating profits still fell a sharp 39% during the period.

Because they are profitable lead generators, I compared the company with other online success stories like The Knot (NASDAQ:KNOT), InsWeb (NASDAQ:INSW), and Bankrate (NASDAQ:RATE). The difference here is that the non-Travelzoo companies are fattening up their bottom lines. After a few years of impressive growth, Travelzoo's earnings have fallen over the past two quarters.  

We can't blame taxes for the entire shortfall. Unfortunately, we can't peg the balance of the blame on the company's decision to expand aggressively in other countries. Even in North America, where top-line growth has slowed to just 10% during the period, operating profits fell.

I'm not ready to throw in the towel on Travelzoo just yet. The concept still works. Even during this troublesome quarter, pre-tax profit margins clocked in at an impressive 27%. Most companies would be envious.

One shouldn't confuse Travelzoo with online portals like Expedia (NASDAQ:EXPE), Orbitz Worldwide (NYSE:OWW), and (NASDAQ:PCLN). Travelzoo is not an online travel agency. As a publisher of sponsored travel bargains with fat margins, one would think that it's a model that is dying to be aped. The problem is that Travelzoo is the brand that more than 11 million willing recipients welcome into their inboxes every week.

Like its fans, Travelzoo's problems are globetrotters. Let's see what the company can do about going from globetrotter to world beater. A good start would be putting an end to the sad streak of quarterly target misses, sooner rather than later. 

Your Foolish itinerary:

Priceline is a Stock Advisor recommendation. The Knot and Bankrate are Rule Breakers newsletter picks. Take a free 30-day trip with a trial offer to see the world, or at least the list of previous market-thumping stock picks.  

Longtime Fool contributor Rick Munarriz has been inspired by a deal or two on the Travelzoo Top 20 list but 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.

Stocks Mentioned

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*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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