It's not easy to replace the wings and engine of an airplane while it's still flying at 35,000 feet. But that's a metaphor for what Travelzoo, the US-headquartered deals service, is trying to do with its business model.
Travelzoo is attempting to rebalance its mix of revenue streams. This partly requires investing heavily in new services, such as a hotel booking platform set to debut soon -- before those new products cover their costs.
Investors are growing impatient. They've knocked roughly a third off the company's summer share price high, with much of the selling happening since the company's earnings call last week.
The biggest problem in the third quarter was that search revenue took a hit, falling 10%.
The reason: The company had to cut its digital marketing spending on traffic acquisition to be able to afford its investment in Travelzoo's new hotel booking platform, which is intended to enable customers to quickly reserve hotels within Travelzoo's websites and mobile apps.
Update on hotel booking platform
Travelzoo is not betting family silver on the new hotel booking platform, but it will become an increasingly important play in the company's overall strategy.
European boss Richard Singer says the online booking functionality will be rolled out to its English-speaking markets by the end of 2013, with other European sites following in early 2014.
The company is currently contracting with various hotels around the world but, importantly, this will not be a blanket approach - Singer says initially the ability to book will be only available on a few hundred properties, retaining the "hand-picked" nature of the existing model.
Singer says the move "essentially allows people to book a hotel in key markets in which we operate all year round".
Interestingly, Singer says the same-day hotel booking model (via mobile, inevitably) is also a "logical progression" over time, but there are no firm plans in play as yet.
A look at the numbers
For the third quarter, Travelzoo's third quarter results were mixed. The company faced a net loss of $19 million on $37.3 million in revenue (which climbed 5% year-over-year) because of a one-time charge of $22 million from a legal settlement over unclaimed property audits.
Investors looking for a growth story in local deals -- and local deals were something Travelzoo executives had once touted as a route to strong profits -- were disappointed. Local deals revenue fell 8%, with fewer vouchers sold per deal and lower "take rates."
Travelzoo had reduced its marketing of its flight search tool Fly.com to focus on Local Deals, with a predictable effect: Fly.com's third-quarter revenue fell by a tenth over the same period a year earlier to $6 million.
On the plus side, travel revenue rose by 16% year over year, thanks to spikes in the sales of vacation packages and Getaway hotel deals in North America and Europe.
Travelzoo sites globally saw subscriber numbers jump 14%, year-over-year, to 29.6 million members, which the company partly credits to the use of new social media tactics.
It's true that the company's share price has taken a beating since these earnings numbers were reported. Yet the company's overall narrative is sunnier.
This morning's share price of $20.73 is still above its $16 price low of a year ago. The company has been profitable for the past eight quarters. Plus its share price has soared 187% during the past five years.
But if investors are waiting for the upcoming hotel-booking platform to juice the company's results, they may have to wait another year for results. Repairing planes in mid-air isn't an easy or quick maneuver.
NB: Additional reporting by Kevin May.
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