Travelzoo 2006 Annual Report Download - page 54

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In North America, we have noted a general trend of increasing cost per new subscriber over the last few years,
driven by a gradual increase in online advertising rates by our media suppliers as well as increased activity from
competitors using similar forms of online advertising for their own marketing efforts. The decline in new subscriber
acquisition costs for North America in Q3 2004 reflects the effect of new advertising campaigns which were tested
at that time. The decline in new subscriber acquisition costs in North America in Q3 2006 was impacted by a credit
received from a vendor in the amount of $170,000. We do not consider these declines in new subscriber costs to be
indicative of a longer-term trend or to indicate that our subscriber costs are likely to stay at this level or are likely to
decline further.
Increasing average cost per subscriber is likely to result in higher absolute marketing expenses and potentially
higher relative marketing expenses as a percentage of revenue. Going forward we expect continued upward pressure
on online advertising rates and continued activity from competitors, which will likely increase our cost per new
subscriber over the long term. The effect on operations is that greater absolute and relative marketing expenditure is
necessary to continue to grow the reach of our publications. However, it is possible that the factors driving
subscriber acquisition cost increases can be partially or completely offset by new or improved methods of
subscriber acquisition using techniques which are under evaluation.
Segment Information
We have presented the business segments in this Form 10-K based on our organizational structure as of
December 31, 2006.
North America
2006 2005 2004
Year Ended December 31,
(In thousands)
Net revenues . . ....................................... $66,509 $50,161 $33,679
Income from operations ................................. 31,337 16,000 11,033
Income from operations as a % of revenues .................. 47% 32% 33%
In North America, revenues increased 33% in the year ended December 31, 2006 compared to the same period
in 2005. The North America revenue growth was driven by the increase of advertising rates, additions of new clients
and increased spending from existing clients.
North America revenues increased by 49% in the year ended December 31, 2005 compared to the same period
in 2004. The North America revenue growth was driven by the revenues from our new product, SuperSearch,
increased advertising rates, additions of new clients and increased spending from existing clients.
Income from operations for North America as a percentage of revenue in the year ended December 31, 2006
increased by 15 percentage points compared to the same period in 2005. This was primarily due to a 10 percentage
point decrease in sales and marketing expenses as a percentage of revenue in the year ended December 31, 2006
compared to the same period in 2005. Sales and marketing expenses for North America increased to $26.4 million in
the year ended December 31, 2006 compared to $24.7 million in the same period last year. This $1.7 million
increase was primarily due to a $1.2 million increase in salary expense for sales and marketing staff and a $419,000
increase in travel expenses. There was also a 5 percentage point decrease in general and administrative expenses as a
percentage of revenue in the year ended December 31, 2006 compared to the same period last year. General and
administrative expenses for North America decreased to $7.8 million in the year ended December 31, 2006
compared to $8.5 million in the same period last year. This $700,000 decrease was primarily due to 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, offset by a $242,000 increase in office expenses.
Income from operations for North America as a percentage of revenues in the year ended December 31, 2005
decreased by 1 percentage point compared to the same period in 2004. This was primarily due to a 3 percentage
point increase in sales and marketing expenses as a percentage of revenue in the year ended December 31, 2005
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