) is a leading global Internet media company. With over 24 million
subscribers, it provides travel and entertainment companies, as
well as small businesses the ability to efficiently reach out to
consumers to sell their services and products. Apart from the
Travelzoo websites, the company has several publications and
newsletters across the globe. In addition, Travelzoo operates
Fly.com, a travel search engine and a social commerce business
(Local Deals), which provides its subscribers with high quality
deals for restaurants, spas, shows, concert events. etc.
Touching a high of $31 at the start of the year,
Travelzoo has been treading a downward path since then. Apart
from the adverse macro conditions, we believe that
certain intrinsic factors which have slowed down Travelzoo's growth
this year, are also responsible for the negative sentiment among
Here we provide a quick snapshot of how Travelzoo makes money,
the important segments that contribute to its business and the key
factors driving its valuation.
See our full analysis of
What are the key markets for Travelzoo?
How does the company make money?
Travelzoo's services are available in North America, Europe
and Asia Pacific. In Asia Pacific, its business is operated
by Travelzoo (Asia) Ltd. and Travelzoo Japan K.K., under a
license agreement with Travelzoo Inc. Travelzoo does not have
any significant ongoing involvement with the operations of the Asia
Pacific segment since its sale to Azzurro Capital Inc. in
2009. Thus, Travelzoo now has only two operating segments - North
America & Europe. More than 75% of its business is concentrated
in North America and the remaining in Europe. The company
is witnessing a higher growth rate in Europe as the North America
business nears saturation.
Travelzoo earns majority of its revenue from advertising,
primarily listing fees paid by travel companies, entertainment
companies and local businesses to advertise their offers. The
company also earns revenue from merchant agreements for Local Deals
and Getaway advertisers. In addition, airlines and
travel agencies pay Travelzoo for showing them in the search
results on Fly.com and Supersearch.com.
What Are The Important Degments That Contribute To Its
Historically, Travelzoo's revenue has increased at a rapid pace.
The company made close to $150 million in 2011 and earned 16%
operating profits on the same, which is constant across its
business segments. Advertising accounts for 68% of Travelzoo's
revenues whereas the local deals and search business segments
contribute around 22% and 10% respectively.
Last quarter, a decrease in Travelzoo's search and Local
Deals business led to a significant decline in its revenues, and
the aggressive investment into team expansion and product
portfolio enhancement, put a downward pressure on its operating
margins. However, we believe that with growing strength in its
hotel business, driven by Getaway hotel offering, a robust increase
in mobile traffic and social media integration, Travelzoo is in a
good position to leverage future growth in the online travel
Growing strength in the hotel business
While the reduced revenue from airline bookings and packages
have slowed down growth, the company has witnessed robust growth in
its hotel business, primarily driven by Getaway hotel offering.
Getaways, which was launched in 2011, is a voucher model which is
gaining popularity among medium and small size hotels as it
provides then with an opportunity to stimulate incremental
Currently, Travelzoo does not offer direct online bookings for a
specific date. However, it is in the process of opening up a hotel
booking platform and is working towards providing its users the
ability to book hotels directly via its website through mobile
products. Additionally, the company intends to ramp up its hotel
sales force to capture the growing demand for Getaways.
We feel that the above developments will further accelerate
demand for hotel bookings, which will continue to significantly
contribute to Travelzoo's revenue growth.
Increase in searches via fly.com
Travelzoo's search division includes revenues from both Fly.com,
a travel search engine, and Supersearch, a pay-per-click travel
search tool. While the company has registered an increase in
searches via Fly.com, the number of searches on Supersearch has
declined over the years, as Travelzoo diverts its marketing spend
away from Supersearch and towards Fly.com.
Google's integration of hotel search products on to their main
search results page this year and Travelzoo's focus to bring
Supersearch Europe to profitability, led to a decline in traffic
driven to Fly.com. The company claims that it needs a strategic
review of its Supersearch product to stabilize the decline in
number of searches.
While we forecast a continuous decline in searches via
Supersearch, we estimate the searches on Fly.com to register y-o-y
growth for the rest of our review period. We feel that the launch
of hotel search will power search volumes growth, and the positive
synergy with its core travel business will augur well for traffic
Current investments to drive future growth
Aiming to accelerate its audience growth, Travelzoo has been
aggressively investing in expanding its sales force, enhancing its
product offerings and improvising the content and deals offered on
its websites and newsletters. The company saw a significant decline
in EBITDA margin in 2011 due to increasing advertising spend on
building brand awareness, and higher expenses incurred on account
of headcount growth to scale international expansion.
While the high expense base combined with lower top line growth
could slow down Travelzoo's growth this year, we believe that the
same would accelerate growth once the investments start paying off.
The company intends to pull back certain expenses in line with any
potential decline in revenues in the coming quarters, but remains
determined to continue innovating to stay ahead of competitors.
We forecast the EBITDA margins to reach close to the historical
level by the end of our forecast period.
Our price estimate for Travelzo0 to $23.80
is at a premium of over 30% to the current market price.
a Company's Products Impact its Stock Price at Trefis