Can Travelzoo make going to the zoo fun again?

Travelzoo is a great website and they have 11 million fans that feel the same way too. You don’t book tickets at Travelzoo.com, you click through to the travel provider for that. They don’t charge you for their information, newsletters, or research – they are the friendly online travel solution.

Travelzoo (TZOO) just reported earnings on Wednesday and revenue rose to $19.7 million from $16.4 million a year earlier. They spent $6.7 million in subscriber acquisition and in marketing the Travelzoo brand making a bet that their website is something special. CEO Ralph Bartel said on the earnings call, "we added four senior executives in North America, Europe and Asia. We believe that this positions Travelzoo well to capture the growth opportunities we see ahead for the future."

However their earnings disappointed Wall Street and despite the running of the bulls, Travelzoo got trampled. The stock is down 26% in the last 5 days and is currently flirting with a new 52-week low today. Travelzoo made $4.1 million, or 25 cents a share, for the quarter ended March 31, 2007. The guys at Thomson Financial were looking for a profit of 32 cents a share on sales of $20.4 million. Thus the reason why we are less than $.25 away from a new low and shares trading at $27.69. Turns out kids still love going to the zoo, but stockbrokers hate it.

So now that we’ve hit a new low and with all this money poured into building that fan base, what can we expect going forward?

Susquehanna Financial Group believes costs at Travelzoo will remain high throughout 2007 but improved profitability may show up by the first quarter of 2008. Stifel Nicolaus lowered their earnings estimate for Travelzoo from $1.22 to $1.11 per share, and cut revenue estimates to $81.0 million from $83.4 million.

Keep in mind Travelzoo has only 80 employees and revenue has grown an average rate of 57% for the past three years. What’s hurting Travelzoo is they do not provide estimates of future earnings and Wall Street has no love or patience for that.

The bottom line is TZOO is one lean, mean, online-travel machine. As of last month, there were a ton of people betting against Travelzoo with the short percentage of TZOO’s float at 29.30%. That’s almost 1/3 of the 2.94 million shares of Travelzoo being traded held short. So now that those guys have cleaned house, is it safe to go to the zoo?

Over the past few days holding shares in TZOO was about as fun as visiting Jurassic Park. Now that the worst has happened and with their new fan base, maybe Travelzoo can bring back the fun in going to the zoo.

Frank Lara Jr.
April 26, 2007

Frank Lara Jr. can be reached at [email protected]; he does not own securities in the companies he covers.