Travelzoo Surprises Everyone But Us – More Upside Ahead

April 17, 2015 at 3:01 am Leave a comment

Travelzoo reported an excellent quarter today, one that gave evidence of strength in the core business and the report plus several encouraging comments on the conference call lead us to believe that management remains properly focused on rolling out the hotel booking service. Additionally, we were pleasantly surprised at the degree to which the marketplace seems to be grasping what we had already come to believe – that Travelzoo’s core business has stabilized and the several quarters of heavy investment with little revenue to show for it may be largely behind us, as we expect that future reports will be increasingly impacted in a positive way by hotel booking revenue.

Management’s gloomy outlook and talking down of expectations on the Q4 call led us to believe that Q1 would be less than impressive – in line with analysts’ estimates at best and more likely coming in slightly below the analysts’ expectations. Instead, Travelzoo reported earnings of 13 cents per share, a full 5 cents per share higher than analysts’ expectations and they also reported a top line of $36.5m, outperforming the estimates by $1.7m. Additionally, management made comments in the prepared statements and in the Q&A following the report that were undeniably positive – something we did not get on the Q4 call a few weeks back.

A few of our favorites –

“…we continued to run more deals through our Hotel Booking Platform instead of the Getaways model” + “..our main focus is on hotels at this time”. These comments lead us to believe that TZOO management from the top down understands the transformative opportunity here with the hotel business and all the noise after last quarter’s report about the company moving away from the hotel booking business was just that – noise.

“We had a slow start and then we really did quite well in March” We believe this is evidence that the company’s operations are starting to gain momentum at a really great time and that the stabilization and/or growth of various lines will add fuel to the fire when the hotel booking service results start to materially enhance the company’s income statement.

“we have very good coverage now in sort of the top 10 destinations for North America”. This is great because it means there are now markets where the company can test its full-blown marketing approach vs. some segmented approach that would not give a true indicator of how the various approaches work. This is a key marker in the company’s journey to offer hotel booking on demand to all of its subscribers worldwide, something we hope to see by the end of the current fiscal year.

A development we have been watching that was not discussed specifically on the call is Travelzoo’s deal with Getaroom and a third-party provider of hotel booking connectivity. We had been expecting to see Travelzoo affiliate with one of the larger players in the hotel booking space to gain the critical mass of inventory they need to fully leverage their 27 million strong base of subscribers and we were pleased to discover recently that Travelzoo.com is live with such a deal to access the inventory of Getaroom, a rapidly growing wholesaler of lodging that now counts over 80,000+ hotels in its program. It appears that Travelzoo is offering the Getaroom inventory in its existing markets currently, but we expect to see Travelzoo eventually roll out Getaroom and or other partner’s inventory in other markets of significance (those markets called “secondary” by Mr. Bartel on today’s call) over the next few months.

Getaroom is a great strategic partner for Travelzoo as it allows them to get the hotel inventory they need (80,000+ inventory and deep coverage in every market of significance in North America) without boosting the fortunes of their biggest competitors (Priceline & Expedia) in the space. Additionally, it allows them to offer rates that are unique from those of its ubiquitous competitors whose far-flung affiliate partners (see Mr. Bartel’s Trivago conversation on the call about this very situation) make their rates seem like the going market rate when in fact there may be a better rate for consumers who will shop Travelzoo in their shopping process. Getaroom often has lower total prices than Expedia, Booking.com, Priceline, etc. and Travelzoo will benefit tremendously from being able to offer rates that are distinct (and in many cases lower) from those offered by its larger competitors.

Getaroom is run by Bob Diener and David Litman, the original founders of Hotel Reservations Network, which became Hotels.com. Messrs. Diener and Litman essentially invented the wholesale lodging business that transformed Expedia from a barely profitable OTA into a powerhouse that eventually gobbled up most of its competitors and that allowed Priceline go from company doing a reverse split to avoid becoming a penny stock to the $1200+/- stock it is today. While Priceline’s wholesale business is now secondary to its agency hotel business (booking.com), I think it is fair to say that the engine that powered the growth of Expedia and Priceline has its roots in the model developed by the pioneers who now lead Getaroom.com and we think this is great company for Travelzoo.

We continue to believe that the hotel booking business will transform Travelzoo and create significant wealth for shareholders, so we are pleased to see the company taking the steps we have long believed needed to be taken to expand the hotel business at a faster pace. Travelzoo’s arrangement with Getaroom will allow them to better leverage their subscriber base and expand their market coverage significantly in a very short time frame as they gain very broad and deep inventory with unique “Best Rate Guaranteed” rates. Additionally, we believe Travelzoo’s first quarter report indicates that the company has turned a corner with its core operations and we expect the hotel booking business to have a very positive impact on Travelzoo’s numbers going forward. The rally in Travelzoo shares on such large volume suggests that new investors are starting to understand what can happen here as the company transforms its model and those that have previously bet against Travelzoo may finally be coming around too. With over 1/3 of the “true public float” sold short prior to the release of the quarterly report, it’s no wonder that there was such scrambling for shares today and we would not be surprised at all to see that continue until it finds a price range where more investors are willing to sell enough shares.  Despite the move of over 50% since we first recommended TZOO to the Groove community a couple of months ago, we think investors would do well to hold on to their shares here as today’s move only reflects the turn and we expect Travelzoo to be trading at significantly higher prices a few months out.

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