Travelzoo Stock Price Tumbles as Costs Devour Profit

Travelzoo, whose best-known product is a deals newsletter, seemed to be having a good year until it reported its second-quarter earnings on Wednesday.

The leaden reality of lower than expected revenues and profits led investors to knock 30 percent off the share price by midday Wednesday, to $13.

Economic strength in the company’s key markets of North America, Europe, and Asia Pacific should have been reflected in a boost in company performance in the three months to June 30.

While the New York City-based company booked revenue that was up 6 percent year-over-year, its revenue of $28.1 million undershot market expectations.

Net income for the second quarter was $477,000. Higher investment in marketing drove a decline in earnings per share from the previous quarter.

CLARIFICATION: Although investors shaved 30 percent off Travelzoo’s share price, when this reporter wrote “revenue undershot market expectations,” I was wrong because the market consensus for second-quarter revenue was $28 million and Travelzoo delivered $28.1 million. An earlier version of this article said the company had an “operational loss of $1.5 million,” which was incorrect. Sorry.

Speaking on a call with investment analysts, CEO Holger Bartel said, “I’m obviously not happy about the stock price today.”

“It’s disappointing because our business continued to grow at the same pace as the first quarter,” said Bolger. “But we increased ad spend by $1 million. That’s what impacted earnings.”

Travelzoo’s management is partly to blame for the stock market gyrations. Rather than smooth changes from quarter to quarter, the company has allowed large swings in its earnings per share from $0.20 in the last quarter to $0.04 in the second quarter. Its performance this quarter is also down from $0.05 in the same period a year ago.

The company would counter that Travelzoo is profitable, albeit it had allowed an expectation of even higher profit to be created among investors. Travelzoo’s earnings-per-share were slightly lower than second quarter 2017 because, the company said, it increased its marketing investment in second quarter 2018 because it strongly believes in the business fundamentals and long-term growth. Therefore. The marketing spending may not immediately generate a revenue or profit boost in the same quarter but the expectation is that it will in the mid-term.

Travelzoo, which styles itself as a global media commerce company, has seen its annual revenue and net income decline year after year since 2013. In response, it has tried to move from a business model based on online advertising revenue, which has been declining, to a mixed model that is more similar to a commission-taking online travel agency.

Earlier this year, investors thought the company was gaining traction. In the first quarter, the company reported total revenue growth as having resumed after years of decline.

Bartel said the growth would continue. He repeated that claim on Wednesday. “We look to grow revenue even faster in the second half of 2018,” he said, reiterating his plan, announced in April, to double the size of the company within the next few years.

But growth has been hard won. Take its membership numbers as one measure. The company touted that this quarter it had 29.8 million members. That is only 300,000 higher than the 29.5 million members it reported in the third quarter of 2017.

Bartel said that the company’s costs are fixed, which means that once its new products become popular, a flywheel effect will kick in and the company will scale quickly.

Today it must make investments in growing its business in Asia and in a dynamic packaging tool that lets hotels create packages that reach a broader and more flexible number of airports. But those investments won’t last forever, he said.

Travelzoo beat market forecast on topline revenue, and has continued to grow topline 3 quarters in a row. Also all of its regions (Asia Pacific, Europe, North America) showed topline growth this quarter, which is a positive sign, the company said.

Bartel’s plan sounds good in theory. But a risk lies in that customer acquisition has become more difficult for online travel companies in general, according to comments made by executives from larger online travel companies in recent earnings. Online marketing costs have risen from a variety of factors.

In the past year, investors have been of mixed opinions about Travelzoo. Late last year, the hedge fund Osmium Partners doubled its holdings in the company, giving it about a 5 percent stake in Travelzoo.

The only public holder of stock with a larger share is Ralph Bartel, the company’s founder, chairman, chief talent officer, and brother of the CEO.

That said, Bartel has been selling shares since May 2017 — selling about 460,000 shares across the period. The selloff still left him with about 6.7 million shares, or 53 percent, of the company. In further profit-taking last month, Ralph Bartel’s investment vehicle Azzurro Capital also sold 69,758 shares worth $1,264,712.

On a brighter note, Travelzoo authorized a plan on March 5 to buyback 500,000 outstanding shares. If no one else is buying at the moment, at least the company will bet on itself.