Travelzoo 2006 Annual Report Download - page 52

Operating Expenses
Sales and Marketing
Sales and marketing expenses consist primarily of advertising and promotional expenses, salary expenses
associated with sales and marketing staff, expenses related to our participation in industry conferences, and public
relations expenses. Sales and marketing expenses for the year ended December 31, 2006 increased to $29.4 million
and to $25.9 million for the year ended December 31, 2005 from $15.7 million for the year ended December 31,
2004. The increase in sales and marketing expense for the year ended December 31, 2006 was primarily due to a
$1.8 million increase in salary expense and a $765,000 increase in expenses related to our participation in industry
conferences, public relations and the introduction of video content on our Web site. The increase in sales and
marketing expenses for the year ended December 31, 2005 was primarily due to an increase of $8.5 million in our
advertising campaigns and a $1.7 million increase in salary expense.
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, 2006, 2005, and 2004,
advertising expenses accounted for 70%, 78%, and 75% respectively, of sales and marketing expenses. Advertising
activities during these three year periods consisted primarily of online advertising.
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 significant number of new
subscribers in every quarter and continue to promote our brand. 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 efforts successfully, and the degree of competition in our industry.
In May 2005, we began operations in the U.K. In February 2006, we began operations in Germany. In April
2006, we began operations in Canada. In July 2006, we opened a sales office in Spain. The start-up of our business in
Europe and Canada and our plan to expand into other countries in 2007 is expected to result in a significant increase
in our sales and marketing expenses in the foreseeable future.
General and Administrative
General and administrative expenses consist primarily of compensation for administrative and executive staff, fees
for professional services, rent, bad debt expense, payments made to former stockholders of Travelzoo.com Corporation,
amortization of intangible assets and general office expense. General and administrative expenses increased to
$9.4 million for the year ended December 31, 2006 and to $9.1 million for the year ended December 31, 2005 from
$6.2 million for the year ended December 31, 2004. In 2006, general and administrative expenses increased primarily
due to an increase of $583,000 in office expenses and a $377,000 increase in salary expense as headcount grew and with
the expansion to foreign markets and a $243,000 increase in legal and professional service expenses. These increases
were offset by a $1.0 million decrease in expenses related to a program under which the Company makes cash payments
to people who establish that they were former stockholders of Travelzoo.com Corporation, and who failed to submit
requests to convert their shares into Travelzoo Inc. within the required time period. In 2005, general and administrative
expenses increased primarily due to expenses of $1.0 million for SOX compliance and also due to an increase of
$536,000 in expenses for office space as headcount grew and with expansion to foreign markets.
We expect our headcount to continue to increase in the future. The Company’s headcount is one of the main
drivers of general and administrative expenses. Therefore, we expect our general and administrative expenses to
continue to increase.
Our strategy to replicate our business model in foreign markets could result in a significant additional increase
in our general and administrative expenses.
The Company recorded expenses of $160,000, $1.2 million and $1.2 million in the years ended December 31,
2006, 2005 and 2004, respectively, related to a program under which we make cash payments to people who
establish that they were former stockholders of Travelzoo.com Corporation, and who failed to submit requests to
convert shares into Travelzoo Inc. within the required time period. The expenses are based on the number of actual
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