Travelzoo 2005 Annual Report Download - page 45

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2003. The increase in our concentration of revenues is primarily the result of our new SuperSearch product.
SuperSearch listings are primarily purchased by large online travel agencies. There is a high concentration in
the online travel agency segment. Management expects revenue concentration to remain at the current level in
the foreseeable future.
Management believes that our ability to increase revenues in the future depends mainly on four factors:
‚ Growth of the online advertising market for travel in the U.S. and in other countries where we do
business;
‚ 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 will be 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 have historically increased the number of clients in each
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 $725,000 for the year ended December 31, 2005 and to
$678,000 for the year ended December 31, 2004 from $461,000 for the year ended December 31, 2003.
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 $878,000 for the year ended December 31, 2005 and to $695,000 for the year ended December 31,
2004 from $399,000 for the year ended December 31, 2003. As a percentage of revenue, cost of revenues was
2% for the years ended December 31, 2005, 2004, and 2003. Cost of revenues remained at the same
percentage of revenues 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 $25.9 million for the year ended December 31, 2005 and to $15.7 million for
the year ended December 31, 2004 from $9.6 million for the year ended December 31, 2003. The increase in
sales and marketing expenses in both years was primarily due to increases in our advertising campaigns. The
goal of our advertising campaigns was to acquire new subscribers for our e-mail products, promote
SuperSearch and increase brand awareness for Travelzoo. For the years ended December 31, 2005, 2004, and
2003, advertising expenses accounted for 78%, 75%, and 71% 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, 2005 and 2004 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
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