Travelzoo 2004 Annual Report Download - page 42

Management believes that our ability to increase revenues in the future depends mainly on three factors:
‚ Our ability to increase our advertising rates;
‚ Our ability to sell more advertising to existing clients; and
‚ Our ability to increase the number of clients.
We believe that we can increase our advertising rates only if the reach of our publications increases. We
do not know if we are able to increase the reach of our publications. We believe that we can sell more
advertising only if the market for online advertising continues to grow and if we can maintain or increase our
market share. We believe that the market for online advertising continues to grow. We do not know if we will
be able to maintain or increase our market share. We historically increased the number of clients in every year
since inception. We do not know if we will be able to increase the number of clients in the future.
Average revenue per employee increased to $678,000 for the year ended December 31, 2004 and to
$461,000 for the year ended December 31, 2003 from $379,000 for the year ended December 31, 2002.
Cost of Revenues
Cost of revenues consists of network expenses, including fees we pay for co-location services, depreciation
of network equipment and salary expenses associated with network operations staÅ. Our cost of revenues
increased to $695,000 for the year ended December 31, 2004 and to $399,000 for the year ended December 31,
2003 from $351,000 for the year ended December 31, 2002. As a percentage of revenue, cost of revenues was
2% for the years ended December 31, 2004 and December 31, 2003, and 4% for the year ended December 31,
2002. The decreases resulted primarily from an increase in revenues that outpaced the increase in our network
operations costs. Cost of revenues did not increase at the same rate as our revenue growth because we did not
need to increase our network operations staÅ signiÑcantly, and we did not have increases in fees for co-location
services to support the increase in revenues.
Operating Expenses
Sales and Marketing
Sales and marketing expenses consist primarily of advertising and promotional expenses, public relations
expenses, conference expenses, and salary expenses associated with sales and marketing staÅ. Sales and
marketing expenses increased to $15.7 million for the year ended December 31, 2004 and to $9.6 million for
the year ended December 31, 2003 from $5.7 million for the year ended December 31, 2002. The increase in
sales and marketing expenses in both years was primarily due to increases of our advertising campaigns. The
goal of our advertising campaigns was to acquire new subscribers for our e-mail products and to increase brand
awareness for Travelzoo. For the years ended December 31, 2004, 2003, and 2002, advertising expenses
accounted for 75%, 71%, and 69% respectively, of sales and marketing expenses. Advertising activities during
these three year periods consisted primarily of online advertising. The increase in sales and marketing expenses
in the years ended December 31, 2004 and 2003 was also due to an increase of our sales force and our decision
to hire more experienced sales personnel.
Our goal is to increase our revenues from advertising sales. One important factor that drives our revenues
are our advertising rates. We believe that we can increase our advertising rates only if the reach of our
publications increases. In order to increase the reach of our publications, we have to acquire a signiÑcant
number of new subscribers in every quarter. Therefore, we expect our sales and marketing expenses related to
our business in the United States of America as a percentage of revenue to remain at the current level or
increase from the current level. The main factor that impacts our advertising expenses is the average cost per
acquisition of a new subscriber. We believe that the average cost per acquisition depends mainly on the
advertising rates which we pay for media buys, our ability to manage our subscriber acquisition eÅorts
successfully, and the degree of competition in our industry.
If we replicate our business model in selected foreign markets, this could result in a signiÑcant additional
increase in our sales and marketing expenses in the foreseeable future.
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