Daily Deal updates

I've gotten a lot of questions about sharing data on TZOO and OPEN since I posted my articles several weeks ago on my blog, so I wanted to provide a brief update.  I was cautious on both TZOO and OPEN due to their enormous runs prior to my posts, although I had taken a small position in TZOO to get a play on the deal hype at a significantly cheaper valuation (there was more analysis than this, but for simplicity sake, let's leave it at that).  At that time, I was more impressed with the deals and the promotion I had seen out of OPEN as they had quickly ramped up their high-end restaurant offerings to a number of cities and had been expanding their city base at the rate of about 1 new city per week.  They also started sending spotlight deals to anybody that was registered on their OpenTable website to help grow the offering by word of mouth.

As of a month ago, TZOO had been lagging pretty substantially.  They were offering new deals very sporadically, running in only a few markets where they had not been selling very impressively.  It was also nearly impossible to even find their "local deals" on their website homepage (www.travelzoo.com).  While the local deals service was highly complimentary to their existing travel offerings, they were not promoting it well and it wasn't exactly "snowballing" very fast.

What a difference a month makes!  About a week after I wrote the two articles, I spoke with another analyst that was more bullish about TZOO and their offerings; he got me thinking more about the value proposition that TZOO offered and their ability to grow above and beyond the purely restaurant offerings that OPEN brought to the table (no pun intended).  I maintained, and still do, that it will be tough for OPEN to widen their offerings past higher end restaurants, but what I had not considered as thoroughly is whether diners would get high-end restaurant fatigue.  Although still too early to tell definitively, with 8-12 full weeks of data from many OPEN cities, it appears this may be the case.  In every city where spotlight is offered, except NYC, the average revenue/week has been dropping since they started offering deals in the city (all spotlight deals, except one week in Chicago, have been $25, making the data easy to track).  Several cities have dropped sequentially every week since spotlight began, with the losses between week 1 and the current week being between 30 to 40%.

In the meantime, TZOO has gone on a complete assault on the daily deal space, launching to several new cities and having blowout week after blowout week.  With an e-mail distribution list that boasts over 22 million subscribers, not only are people used to getting e-mailed by TZOO, they are now becoming more familiar with the daily deal space as the Groupons and Living Social's of the world become more well known (anecdotally, my mom asked me if I had "heard about these Groupon things" the other day, so the word has officially gotten out).  TZOO has also been offering a wide array of deals, similar to Groupon...everything from Mani/Pedi deals to indoor skydiving and wine & cheese classes.  Because of the price lumpiness of TZOO deals, it's not as easy to get an average deal stat, but there has been noticeable growth in the very successful deals (those selling +$50K gross revenue).

What has this done for TZOO from a revenue perspective?  Since their first deal was offered in Des Moines on July 29th through the end of Q3, they sold ~$850K (gross rev.) of deals.  Through not even three weeks of Q4 and into several more cities, they have made over $1MM in gross revenue with seven deals grossing over $50K each.  It will be an ongoing experiment through the rest of the quarter to see how many more cities they launch and if the deals keep selling as well as they have been, but the first few weeks of Q4 have been extremely encouraging, to say the least.  From a valuation and (less) hype perspective, as well as an offerings and distribution perspective, I still believe the best way to play the trend in the daily deal space is TZOO.  If they can continue at their current rate in just the cities in which they currently operate, assuming a 30% net margin, TZOO should have an additional $0.10-0.12 of EPS for the quarter.

Disclosure: Author has a long position in TZOO; no position in OPEN

OPEN: Update On Daily Deals

As a follow up to my previous article on Travelzoo (TZOO) from Monday, Sept. 13 (which is up +25% as of writing), I put together some recent deal data for OpenTable that I think is pretty interesting.  Getting a little more detailed on the deal services each company offers, Travelzoo has a much more erratic timing on their deals, they may last 3 days or 1 week according to whatever hurdle they are trying to clear on sales, which is unclear and the Company is notoriously hard to reach (I even spoke to one of the few analysts that cover them and he said he communicates mainly via e-mail with IR).  TZOO deals tend also to be lower end ($10 of cupcakes on TZOO vs. $25 off at Gordon Ramsey restaurant on OPEN).  Thus far, OpenTable has had a more stable one deal a week schedule that tends to be at higher end restaurants and all have sold very well.  See below:

During the first week of launch in a new city, activity tends to be very strong, which has been no different in D.C. this week, where OPEN sold 1,992 deals in the first week.  What is most encouraging in their data vs. TZOO is how many deals they are selling and the consistent price point.  TZOO, while having done daily/weekly deals since mid-July, has managed to sell approximately 12,000 deals at prices from $10 to $99, while OPEN, having just launched it's first deals in NYC and Boston in early August, has managed to sell well over 26,000 deals at an average price of ~$25, netting them almost $700K gross additional revenue in a month and a half, in only 7 cities.  The reason I have harped on this again after only one week is that they have only launched in 7 large markets (netting an annualized gross revenue of ~$5.4), while there are probably an additional 20 or more markets that could easily bring in these number of deals each week if they can maintain the quality of restaurants and another 30 in smaller markets that could bring in 1/3 as many deals.  

While you may look at this as a skeptic and say the market is crowded and there are 200 daily deal guys out there offering a similar service/product, I would retort that there are not many that are peddling the high-end like OPEN and there aren't any that have the same diner brand recognition, restaurant relationships and distribution that OPEN does in this particular space.  If you're still skeptical and you think the fad will go away, ask yourself: if you got a 50% off deal one week for a favorite restaurant nearby, then the next week you got a similar offer from another restaurant you really like, would you pass on the second one and say, 'nah, I already saved money last week, no reason to do it again'.  Of course not...recession or not, people like to save money and you'd buy a deal every week if you were presented with quality, desirable restaurants and that's what I believe OPEN aims to do.

Since I published this piece originally on Friday afternoon to my Blog, Barron's came out with a full story over the weekend regarding the rich price of OpenTable shares.  The piece makes several good points that have been harped on by every short seller or naysayer on the stock, mainly that it's expected growth (or lack thereof) does not justify it's high multiple.  Barron's says, "it's valuation, at 110x this year's estimated earnings of 59 cents a share, and 75 times next year's forecast of 87 cents, could lead to sever indigestion."  While I don't disagree that it may be time to take some profits off the table if you own and probably not the best time to get in if you do not, the article neglects to properly highlight the basis for the recent moves in the shares - the Spotlight deals.  With only one brief mention towards the end of the piece, Barron's doesn't seem to grasp the growth potential of this new revenue source.  

I'll leave the conversations of valuation to another forum (expensive for my blood given the recent run up), but keep in mind that if they can earn $5.4MM gross revenue on 7 cities, what happens when that is 25 cities or 50 cities?  Below is a conservative snapshot of the impact of daily deals for this year (2 cities, ramping to 14) and 2011 at only 25 cities.

Disclosure: Small Long position in TZOO, no position in OPEN

TZOO: Still more upside from daily deals

As many of you know, there is a phenomenon known as Groupon that has been sweeping the nation and is now moving into other countries as well.  For those unfamiliar, what Groupon does is negotiate one really great deal in your city each day at a huge discount (normally 30-90% off) and send it to you in a nice morning e-mail.  These deals may be for local restaurants, spas, or fun activities.  Along with Groupon, which is in over 100 cities, there have been many copycat services like LivingSocial, BuyWithMe, etc.  (Shameless plug: a couple of friends run a great site called Yipit.com that aggregates all of these daily deals in several cities and sends you ones based on preference of the types of deals you like, go sign up)

The business model is not too difficult to set up as long as you have some tech savvy to create a website and can devote the time of at least one person to pound the pavement and find businesses that want to do the deals.  The businesses win because they get new customers they may not have otherwise gotten, the Groupons of the world win, because they get a cut: 50% of the face value of the coupon.  That's right, 50% for negotiating the deal and posting it on a website.

I'm simplifying it quite a bit, but the bottom line is that it takes very few bodies to get the deals negotiated and the margins are HUGE.  Past paying people to find deals and keeping the lights on, the cost structure is not very burdensome and you can make a ton of money, which is why recently, Groupon raised a round of venture capital that placed a $1.35Bn valuation on the company (see techcrunch.com/2010/04/18/its-official-groupon-announces-that-1-35-billion-valuation-round/)...that's right, BILLION.  According to stats, Groupon reaches around 18 million people via their daily e-mail. and has over 100 deals running a day.

As I said, the low barriers to entry have brought a lot of entrants into this space and now a few publicly traded companies have gotten into the peddling of daily deals as a new revenue source and to reach additional customers that may use the site for other reasons once they are there.  Travelzoo (TZOO), OpenTable (OPEN), and The Knot.com (KNOT) are the notable entrants that have launched in several cities.  While they have only been in this business line for a month or so, their results have already proven very compelling and the stock prices of TZOO and OPEN have subsequently shot up, with BofA-ML recently upgrading OPEN based primarily on their daily deal revenue that will be coming in.

While I think OpenTable has a great business and I use the site frequently, their valuation and reach makes them less compelling to me than Travelzoo, which already has a daily e-mail that reaches +21 million people around the world on a daily basis to hoc travel deals.  The TZOO daily deal is different though...instead of a flight or a hotel that is available for several weeks or months for a discount rate, the daily deal is a one day, huge savings coupon for a specific restaurant, spa, activity, etc. deal.  They currently offer the daily deal in 6 cities (SF, LA, Houston, Chicago, Minneapolis, and Des Moines(!?)) and have done well with the deals they have offered so far, selling several hundred in each city.

Here is why I think it's a game changer for them and why you, as an investor can take advantage of information that is new enough that I don't think most of Wall St. fully understands just how big this could be.  Below are the stats for recent deals on TZOO.  As you can see, there are several deals in a couple of the cities and one deal in a few of the newer markets.  For conservatism sake, I have assumed that TZOO has not gotten as good of a revenue share deal as Groupon and only gave them 30% credit for the face value of the deals, but as you can see, the revenue is material to a company that is this small when you consider they will potentially do lots of these deals each quarter going forward...and they haven't even launched in NYC, Miami, Philly, Dallas, etc.  If they can make this much in a market like Des Moines, imagine what they could do in larger 2nd tier markets like Cleveland, Tampa or San Antonio for instance.

Example Deals
Des Moines	Deals Bought	Deal Value	Total $ Sold	TZOO Revenue*
Deal 1	125	$10	$1,250
Deal 2	107	$10	$1,070
Deal 3	65	$14	$910
Deal 4	25	$10	$250
Deal 5	48	$15	$720
Deal 6	717	$20	$14,340
Deal 7	358	$25	$8,950
Deal 8	196	$10	$1,960
DM TOTAL			$29,450	$8,835
Chicago
Deal 1	419	$50	$20,950
Deal 2	970	$59	$57,230
CHI TOTAL			$78,180	$23,454
Minneapolis
Deal 1	500	$40	$20,000
Deal 2	1,326	$10	$13,260
Deal 3	1,217	$39	$47,463
Deal 4	1,055	$10	$10,550
MINNY TOTAL			$91,273	$27,382
Houston	112	$59	$6,608
LA	472	$89	$42,008
SF	99	$25	$2,475
OTHER TOTAL			$51,091	$15,327
TOTAL				$74,998

 *Assumes TZOO makes 30% of deal face value

Assuming TZOO does not roll out to any additional cities for the remainder of this quarter and giving them credit for this amount of revenue for ONLY 20 DAYS a quarter (this is a rough approximation, but fair for conservatism in my mind), TZOO could earn an additional ~$1.5MM in revenue per quarter (~5.5% growth over what they earned in Q2), but the best part is the margin on this revenue should be extremely high going forward as it takes so little manpower compared to the rest of their business to get these deals negotiated.

As an added bonus, given that TZOO already has a sales team that is focused on getting local travel, entertainment and hotel deals for their main service, ramping up this service in other cities should be relatively easy...heck, Groupon is launching in about 1 new city a week at this point.  Going forward, TZOO will roll out to more cities domestically with more deals.  International is an enormous opportunity as well, with many Western European cities just recently getting on the daily deal bandwagon.  If only a few deals and a few cities can grow revenue this significantly, imagine what could happen in coming quarters when they have 10-20 cities and more deals running simultaneously.  That 40x P/E multiple they currently sport could drop to a meager 15-20x when the E grows.

Disclosure: No position at this time, but evaluating a long in shares of TZOO