Travelzoo 2012 Annual Report Download - page 87

Our Search category of revenue includes comparison shopping tools for consumers to quickly and easily compare airfares, hotel and car
rental prices and includes SuperSearch and Fly.com products. The revenues generated from these products are based upon a fee for clicks
delivered to the advertisers or a fee for clicks delivered to advertisers that resulted in revenue for advertisers (i.e. successful clicks). We
recognize revenue upon delivery of the clicks or successful clicks.
Our Local category of revenue includes the publishing revenue for negotiated high-
quality deals from local businesses, such as restaurants,
spas, shows, and other activities and includes Local Deals vouchers and entertainment offers (vouchers and direct bookings). The revenues
generated from these products are based upon a percentage of the face value of vouchers or items sold or a fee for clicks delivered to the
advertisers. We recognize revenue upon the sale of the vouchers, when we receive notification of the direct bookings or upon delivery of the
clicks. The Company earns a fee for acting as an agent in these transactions, which is recorded on a net basis and is included in revenue upon
completion of the voucher sale. Certain merchant contracts in foreign locations allow us to retain fees related to vouchers sold that are not
redeemed by purchasers upon expiration, which we recognize as revenue after the expiration of the redemption period and after there are no
further obligations to provide funds to merchants, subscribers or others.
Trends in Our Business
Our ability to generate revenues in the future depends on numerous factors such as our ability to sell more advertising to existing and new
advertisers, our ability to increase our audience reach and advertising rates and our ability to develop and launch new products.
Our current revenue model depends on advertising fees paid primarily by travel, entertainment and local businesses. A number of factors
can influence whether current and new advertisers decide to advertise their offers with us. We have been impacted and expect to continue to be
impacted by external factors such as the shift from offline to online advertising, the relative health of the economy, competition and the
introduction of new methods of advertising. For example, the consolidation of the airline industry reduced our revenues generated from this
sector; the reduction of capacity in the airline industry reduced demand to advertise for excess capacity; the introduction of new voucher-based
products offered by competitive companies impacted our ability to sell our existing advertising products; the reduction in spending by travel
intermediaries due to their focus on improving profitability, the trend towards mobile usage by consumers, the willingness of consumers to
purchase the deals we advertise, the willingness of certain competitors to grow their business unprofitably and the economic uncertainty in
Europe impacted advertiser’s willingness to purchase our advertising. In addition, we have been impacted and expect to continue to be impacted
by internal factors such as introduction of new advertising products, hiring and relying on key employees for the continued maintenance and
growth of our business and ensuring our advertising products continue to attract the audience that advertisers desire.
Existing advertisers may shift from one advertising service (e.g. Top 20 ) to another (e.g. Local Deals and Getaway
). These shifts between
advertising services by advertisers could result in no incremental revenue or less revenue than in previous periods depending on the amount
purchased by the advertisers, and in particular, with Local Deals and Getaway , depending on how many vouchers are purchased by subscribers.
Since the introduction of Local Deals in 2010 and Getaway in 2011, we have seen a decline in the number of average vouchers sold per deal.
Our ability to continue to generate advertising revenue depends heavily upon our ability to maintain and grow an attractive audience to
reach with our advertising publications. We monitor our subscribers and page views of our websites to assess our efforts to maintain and grow
our audience reach. We obtain additional subscribers and activity on our websites by acquiring traffic from Internet search companies. The costs
to grow our audience have had, and we expect will continue to have, a significant impact on our financial results and can vary from period to
period. We may have to increase our expenditures on acquiring traffic to continue to grow or maintain our reach of our publications due to
competition.
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. If we are able to increase the reach of our publications, we still may not be able to or want to increase
rates given market conditions such as intense competition in our industry. We have not had any significant rate increase in recent years due to
intense competition in our industry. Even if we increase our rates, based upon the increased price this may reduce the amount of advertisers
willing to advertise for the increased rates and therefore decrease our revenue.
We do not know what our cost of revenues as a percentage of revenues will be in future periods. Our cost of revenues will increase if the
number of searches performed on Fly.com increases because we pay a fee based on the number of searches performed on Fly.com . Our cost of
revenues will increase if the face value of vouchers that we sell for Local Deals and Getaway increases or the total number of vouchers sold
increases because we have credit card fees based upon face value of vouchers sold, customer service costs related to vouchers sold and
subscriber refunds on vouchers sold. We expect fluctuations
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