Travelzoo TZOO W
October 03, 2008 - 1:17pm EST by
2008 2009
Price: 7.92 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 111 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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What could possibly be interesting about a travel media company in a recession/depression type environment? Well with a combination of the VIC value meter at 58, TZOO's valuation, an highly attractive business model, we think the stock looks very interesting as it has fallen from $100 less than four years ago to $7.90. Why? The company decided to expand its highly attractive business model overseas combined with start up costs and a thin float. International operations are masking the tremendous economics of the US franchise. Travelzoo's US operations (92%) of revenue will run around a 35% operating margin and generate approximately $1.90 per share in EBIT on a $6.80 EV. Yes, crazy even in this market. The company does better in a recession than a strong economy. Why? The vast majority of the company's revenue is based on advertising. As suppliers with high fixed costs in the travel (Hotels, Airlines, Cruises) and entertainment industries (Concerts, Sporting Events, etc) get desperate they come to TZOO to move inventory. Today the EV is $75mn and should generate $25mn in EBIT from US operations with 35%+/- operating margins. We think this is worth at least a 6-7x multiple plus cash or $14 which is a nearly a double from current prices. We think significant value exists in the International operations in 12 countries that have nearly 3 million subscribers and many are growing rapidly. Travelzoo is essentially a online Newspaper, think of the New York Times Travel section and the company makes money on viewers and ad rates not transactions. Travelzoo has the world's largest email subscriber base of 14mn+ and the audience is highly engaged (see below and

Ralph Bartel, the founder started the business with $10,000 in 1998 and is now worth well over $200mn purely from TZOO (TZOO peaked at $1.6bn mkt cap and today is $100mn). Ralph Bartel bootstrapped the business and owned 90% on the IPO, then did everything right sold half his position after the stock went up 5x, then did a secondary, then stock fell to $17-28 range bought back $50 million worth of stock, then fell to $6.50-10 and has been a consistent and large buyer of stock since March 2008 at prices ranging from $6.50-10. Bartel is a Swiss trained PhD in economics and given what we have uncovered so far would consider him highly focused/accurate (they release and give a lot of metrics to understand the business), driven by ROI, and surrounds himself with top notch talent. We think TZOO has a very attractive risk/reward profile, so much so that despite having a huge drag on earnings from international expansion the company still shows up on the "Magic Formula" List.

Travelzoo is the world's largest travel media company in terms of email subscribers to their various letters and have nearly 50,000,000 visitors globally to their various web sites/email subscriptions per month. Conceptually the business is relatively easy to understand. Travelzoo in North America, has 12,000,000 email newsletter subscribers that are looking for a wide range of travel and entertainment options based on price and quality. On the other hand there are 1,100 suppliers with high fixed costs (hotels, cruise lines, airlines, concerts, etc.) that try to make it into Travelzoo's Top 20 weekly email to liquidate their timely inventory. Travelzoo team vets the price/quality relationship and ensures that there are no hidden fees and enough availability. The offers that don’t make the Top 20 are displayed on Travelzoo's various websites and as the economy turns south high fixed cost travel related companies are willing to spend more on marketing to fill rooms or seats. On the price/quality relationship you can find bargains at a very wide range from the Four Seasons to pretty much you name it and rates are usually 35-60% off.

International is making progress: Canada has 700,000 email subscribers, Asia/Pacific: Australia, China, Hong Kong, Japan, and Taiwan just crossed 1 million email subscribers in August (all fairly new within last 12 months), Japan went from -0- to 200,000 subscribers in 4 months earlier this year.

In the UK Market (shows great traction and was the first international operation in 2005) TZOO was rated #1 out of 1,025 travel companies August 2008 (received 2x the traffic of by Hitwise. received 1.6 million clicks on their email list in August 2008. 36% of UK subscribers booked a travel package from Travelzoo in the last 12 months which was up from 18% two years earlier. Avg salary of subscriber is $80,000 Pounds a year has grown from 6% to 11%.

Regarding Europe in general: "as the economy has slowed, we have seen subscriber demand for special offers increase. This is reflected in high click through rates and the increase in subscribers who say they have booked an offer they found in the Travelzoo 20 newsletter." -Chris Loughlin, Managing Dir of TZOO Europe July 15, 2008.

"We believe that our new German and French websites have seen excellent user adoption, since launching in November and January respectively. We are particularly pleased to see that more than 30% of our 7 million visitors came directly to Travelzoo's websites by typing in our web addresses. This illustrates the strength of the relationship between our users and our brand." Chris Loughlin MD TZOO Europe April 16, 2008

One cool feature the site has is called "Deals Near You" its at The site takes your IP address and will show you all the bargains located within 90 miles of where you are on a map.


Travelzoo is an outstanding business: over a 5 year period it has generated aggregate revenues of $248mn with $42mn in free cash flow. While revenue grew from $18mn to $80mn and total CAPEX over this time period was $1mn. ROIC from 2001-2007 averaged 49% while ROE averaged 42%, respectively.

TZOO has the widest distribution by far, with Sherman’s Travel (a private company) in 2nd place with about 4mn subscribers. The difference in subscribers translates into more efficient monetization since TZOO can segment their offerings better which in turn means better click-through rates and hence they charge higher ad dollars. For example, the Top20 is customized for each subscriber (by geography, by prior travel click-throughs, etc.) which gives the advertisers the depth of demand. Through industry contacts, we have heard that TZOO’s customers/advertisers get a substantially higher ROI on ad spend than they do with competitors.

The company is expanding globally: (Canada, Austalia, China, Hong Kong, Japan, Taiwan, France, Germany, Spain, UK, and next appears Brazil, Mexico, India, Korea, Singapore). While TZOO is building out these international geographies, this is creating an obvious drag on profitability. We believe value is being created by building a large global footprint for a high margin travel media company. Not to over emphasize but, the model is simple with very attractive economics and should not be a huge risk but the upside could be large over the next year or two.

Looking at a few key points regarding international expansion:

The US operation has never lost money. This includes the quarter after Sept 2001. Revenue per employee reached a peak $3.5 million and we believe it is approaching a trough at only $400K in revenue per employee. US subscribers are growing slowly after growing from 3 million to over 11 million. We think Europe can possibly get to profitability in 2009.

By the end of the year, TZOO will be launching Metasearch on their site. This is a product similar to Kayak/Sidestep for which TZOO invested $500K and is in addition to their advertising business. Metasearch will allow them monetize the current traffic to their website more effectively.

US $2+/- EBIT masked by Asia and European expansion. This is very similar to an online newspaper. We view the risk as relatively low with very high rewards for success. TZOO peaked at $3.5mn in sales per employee with 40% operating margins! Now we believe we are at trough revenue per employee given head count has essentially doubled this year and many geographies have yet to produce meaningful revenue.

Can Europe get to profitability in 2009? Will the market give any credit to expanding this highly attractive business into Asia with startup costs likely to continue into 2009? We think the international operations despite losses are worth a positive amount..UK/Canada are likely very profitable so the road map is there for international success.

CEO controls the company with 60% ownership. He appears fair. He is the 3rd highest paid employee even though he is Chairman/Founder and until recently CEO. He has done the right things for the business and has not self enriched himself at the expense of shareholders. We think a low ball going private is unlike give: the repurchase of $50mn in stock $17-28 range 1-2 years ago, a price range of $7-100 over the last several years, and the CEO's aggressive insider buying up to $10. If a going private were to occur we suspect it would have to be at least high teens.

Disclaimer: This does not constitute a recommendation to buy or sell this stock. We own shares of the company, and we may buy shares or sell shares at any time without updating the board.


Chairman/Founder very aggressive buyer of stock from March-September 2008 $6.50-10

Company has bought back $50mn worth of stock between $17-28

"Magic Formula list" 2001-2007 ROIC 49% and ROE 42%

20% of the market cap cash

$2 +/- in EBIT from US Operations

International operations should have a positive value given customer acq. costs, growth rates, and user satisfaction.

$42mn in FCF over last 5 years while revenue has grown from $18 to $80mn+ with aggregate CAPEX of $1mn

Company has the potential for $3+ in EBIT within 2-3 years with significant growth

Similar site traffic to Travelocity, Priceline and about 2/3 the size of industry leader Expedia

35%+/- operating margins in the US which is 92% of revenue.

20% of the float short

Fairly liquid for a small cap with about an avg of 170K shares traded daily


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