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Article by DailyStocks_admin    (08-04-08 09:22 AM)

Travelzoo Inc. CEO RALPH BARTEL bought 87219 shares on 7-30-2008 at $6.87

BUSINESS OVERVIEW

Overview

Travelzoo Inc. (the “Company” or “Travelzoo”) is an Internet media company. We publish travel offers from hundreds of travel companies. As the Internet is becoming consumers’ preferred medium to search for travel offers, we provide airlines, hotels, cruise lines, vacation packagers, and other travel companies with a fast, flexible, and cost-effective way to reach millions of users. While our products provide advertising opportunities for travel companies, they also provide Internet users with a free source of information on current sales and specials from hundreds of travel companies.

Our publications include the Travelzoo Web sites (which includes www.travelzoo.com, www.travelzoo.ca, www.travelzoo.co.uk, www.travelzoo.de, among others), the Travelzoo Top 20 e-mail newsletter, and the Newsflash e-mail product. The Company also operates SuperSearch, a pay-per-click travel search engine.

More than 600 companies purchase our advertising services, including American Airlines, ATA, Avis Rent A Car, British Airways, Caesars Entertainment, Expedia, Fairmont Hotels & Resorts, Interstate Hotels & Resorts, JetBlue Airways, Kimpton Hotels, Liberty Travel, Marriott Hotels, Royal Caribbean, Spirit Airlines, Starwood Hotels & Resorts Worldwide, United Airlines, and Vanguard Rent-A-Car.

Our revenues are generated from advertising sales. Our revenues have grown rapidly since we began operations in 1998. Our revenues increased from approximately $84,000 for the period from May 21, 1998 (inception) to December 31, 1998, to approximately $69.5 million for the year ended December 31, 2006.

We have two operating segments based on geographic regions: North America and Europe. North America consists of our operations in the U.S. and Canada. Europe consists of our operations in the U.K., Germany, and Spain. For the year ended December 31, 2006, European operations were 5% of revenues. Financial information with respect to our business segments and certain financial information about geographic areas appears in Note 7 “Segment Reporting and Significant Customer Information,” to the accompanying consolidated financial statements.

Our principal business office is located at 590 Madison Avenue, 21st Floor, New York, New York 10022.

Travelzoo is controlled by Ralph Bartel, who holds beneficially approximately 50.2% of the outstanding shares.

The Company was formed as a result of a combination and merger of entities founded by the Company’s majority stockholder, Ralph Bartel. In 1998, Mr. Bartel founded Travelzoo.com Corporation, a Bahamas corporation, which issued 5,155,874 shares via the Internet to approximately 700,000 “Netsurfer stockholders” for no cash consideration. In 1998, Mr. Bartel also founded Silicon Channels Corporation, a California corporation, to operate the Travelzoo Web site. During 2001, Travelzoo Inc. was formed as a subsidiary of Travelzoo.com Corporation, and Mr. Bartel contributed all of the outstanding shares of Silicon Channels to Travelzoo Inc. in exchange for 8,129,273 shares of Travelzoo Inc. and options to acquire an additional 2,158,349 shares at $1.00. The merger was accounted for as a combination of entities under common control using “as-if pooling-of-interests” accounting. Under this method of accounting, the assets and liabilities of Silicon Channels Corporation and Travelzoo Inc. were carried forward to the combined company at their historical costs. In addition, all prior period financial statements of Travelzoo Inc. were restated to include the combined results of operations, financial position and cash flows of Silicon Channels Corporation.

During January 2001, the Board of Directors of Travelzoo.com Corporation proposed that Travelzoo.com Corporation be merged with Travelzoo Inc. whereby Travelzoo Inc. would be the surviving entity. On March 15, 2002, the stockholders of Travelzoo.com Corporation approved the merger with Travelzoo Inc. On April 25, 2002, the certificate of merger was filed in Delaware upon which the merger became effective and Travelzoo.com Corporation ceased to exist. Each outstanding share of common stock of Travelzoo.com Corporation was converted into the right to receive one share of common stock of Travelzoo Inc. Under and subject to the terms of the merger agreement, stockholders were allowed a period of two years following the effective date of the merger to receive shares of Travelzoo Inc. The records of Travelzoo.com Corporation showed that, assuming all of the shares applied for by the Netsurfer stockholders were validly issued, there were 11,295,874 shares of Travelzoo.com Corporation outstanding. As of April 25, 2004, two years following the effective date of the merger, 7,180,342 shares of Travelzoo.com Corporation had been exchanged for shares of Travelzoo Inc. Prior to that date, the remaining shares which were available for issuance pursuant to the merger agreement were included in the issued and outstanding common stock of Travelzoo Inc. and included in the calculation of basic and diluted earnings per share. After April 25, 2004, the Company ceased issuing shares to the former stockholders of Travelzoo.com Corporation, and no additional shares are reserved for issuance to any former stockholders, because their right to receive shares has now expired. On April 25, 2004, the number of shares reported as outstanding was reduced from 19,425,147 to 15,309,615 to reflect actual shares issued as of the expiration date. Earnings per share calculations reflect this reduction of the number of shares reported as outstanding. As of December 31, 2006, there were 15,250,479 shares of common stock outstanding.

In October 2004, the Company announced a program under which it would make cash payments to persons who establish that they were stockholders of Travelzoo.com Corporation, and who failed to submit requests for shares in Travelzoo Inc. within the required time period. See Note 2 to the accompanying consolidated financial statements.

The merger of Travelzoo.com Corporation into Travelzoo Inc. was accounted for as a combination of entities under common control using “as-if pooling-of-interests” accounting. Under this method of accounting, the assets and liabilities of Travelzoo.com Corporation and Travelzoo Inc. were carried forward at their historical costs. In addition, all prior period financial statements of Travelzoo Inc. were restated to include the combined results of operations, financial position and cash flows of Travelzoo.com Corporation. The restated results of operations and cash flows of Travelzoo Inc. are identical to the combined results of Travelzoo.com Corporation and Travelzoo Inc.

In May 2005, we incorporated Travelzoo (Europe) Limited as a wholly-owned subsidiary in the U.K. and began operations in the U.K.

Travelzoo is listed on the NASDAQ Global Select Market under the symbol “TZOO.”

Our Industry

According to the TNS Media Intelligence, travel companies spent $1.3 billion in 2006 on advertising in newspapers (source: TNS Media Intelligence, 2007). We believe that newspapers are currently the main medium for travel companies to advertise their offers.

We believe that several factors are causing and will continue to cause travel companies to increase their spending on Internet advertising of offers:

The Internet Is Consumers’ Preferred Information Source. Market research shows that the Internet has become consumers’ preferred information source for travel (source: DoubleClick Touchpoints III consumer survey, 2005).

Benefits of Internet Advertising vs. Print Advertising. Internet advertising provides travel companies advantages compared to print advertising. These advantages include real-time listings, real-time updates, and performance tracking. See “— Benefits to Travel Companies” below.

New Advertising Opportunities. The Internet allows travel companies to advertise their sales and specials in a fast, flexible, and cost-effective manner that has not been possible before.

Suppliers Selling Directly. We believe that many travel suppliers prefer to sell directly to consumers through suppliers’ Web sites versus selling through travel agents. Internet advertising attracts consumers to suppliers’ Web sites.

Problems Travel Companies Face and Limitations of Newspaper Advertising

We believe that travel companies often face the challenge of being able to effectively and quickly market and sell their excess inventory (i.e. airline seats, hotel rooms, or cruise cabins that are likely to be unfilled). The success of marketing excess inventory can have a substantial impact on a travel company’s profitability. Almost all costs of travel services are fixed. That is, the costs do not vary with sales. A relatively small amount of unsold inventory can have a significant impact on the profitability of a travel company.

Our management believes that travel companies need a fast, flexible, and cost-effective solution for marketing excess inventory. The solution must be fast, because travel services are a quickly expiring commodity. The period between the time when a company realizes that there is excess inventory and the time when the travel service has become worthless is very short. The solution must be flexible, because the travel industry is dynamic and the demand for excess inventory is difficult to forecast. It is difficult for travel companies to price excess inventory and to forecast the marketing effort needed to sell excess inventory. The marketing must be cost-effective because excess inventory is often sold at highly discounted prices, which lowers margins.

Our management believes that newspaper advertising, with respect to advertising excess inventory, suffers from a number of limitations which do not apply to the Internet:


• typically, ads must be submitted 2 to 5 days prior to the publication date, which makes it difficult to advertise last-minute inventory;

• once an ad is published, it cannot be updated or deleted when an offer is sold out;

• once an ad is published, the travel company cannot change a price;

• in many markets, the small number of newspapers and other print media reduces competition, resulting in high rates for newspaper advertising; and

• newspaper advertising does not allow for detailed performance tracking.

Our Products and Services

We provide airlines, hotels, cruise lines, vacation packagers, and other travel suppliers with a fast, flexible, and cost-effective way to advertise their sales and specials to millions of Internet users. Our publications include the Travelzoo Web sites (which includes www.travelzoo.com, www.travelzoo.ca, www.travelzoo.co.uk, www.travelzoo.de, among others), the Travelzoo Top 20 e-mail newsletter, and the Newsflash e-mail alert service. The Company also operates SuperSearch, a pay-per-click travel search engine. While our products provide advertising opportunities for travel companies, they also provide Internet users with a free source of information on current sales and specials from hundreds of travel companies.

As travel companies increasingly utilize the Internet to promote their offers, we believe that our products will enable them to take advantage of the lower cost and real-time communication enabled by the Internet. Our listing management software allows travel companies to add, update, and delete special offer listings on a real-time basis. Our software also provides travel companies with real-time performance tracking, enabling them to optimize their marketing campaigns.

CEO BACKGROUND

Ralph Bartel, Ph.D., founded Travelzoo in 1998 and has served as our Chairman of the Board of Directors, President and Chief Executive Officer since inception. Prior to September 2006, Mr. Bartel also served as the Company’s Chief Financial Officer. Prior to his founding of Travelzoo, from 1996 to 1997, Mr. Bartel was a Managing Assistant at Gruner + Jahr AG, the magazine division of Bertelsmann AG. Mr. Bartel holds a Ph.D. in Communications from the University of Mainz, Germany, a Ph.D. in Economics from the University of St. Gallen, Switzerland, an MBA in Finance and Accounting from the University of St. Gallen, Switzerland, and a Master’s degree in Journalism from the University of Eichstaett, Germany.

Holger Bartel, Ph.D., has served as a director since June 2005 and was elected Executive Vice President in 2001 after serving as Vice President of Sales and Marketing since 1999. From 1995 to 1998, Mr. Bartel was an Engagement Manager at McKinsey & Company in Los Angeles. From 1992 to 1994, Mr. Bartel was a research fellow at Harvard Business School. Mr. Bartel holds an MBA in Finance and Accounting and a Ph.D. in Economics from the University of St. Gallen, Switzerland. He is the brother of Ralph Bartel.

David J. Ehrlich has served as a director since 1999. Since March 2007, Mr. Ehrlich has served as Chief Executive Officer of ParAccel, Inc., a technology company. From 2003 to 2006, Mr. Ehrlich was Senior Vice President, Marketing and Chief Strategy Officer of NetIQ Corporation. From 1998 to 2002, Mr. Ehrlich was Vice President, Product Management and Strategic Partnering for Visual Networks, Inc. From 1993 to 1998, Mr. Ehrlich worked as a consultant for McKinsey & Company. Mr. Ehrlich holds a bachelor’s degree in Sociology from Stanford University, a Master’s degree in Industrial Engineering from Stanford University, and an MBA from Harvard Business School.

Donovan Neale-May has served as a director since 1999. Since 1987, Mr. Neale-May has been President of Neale-May & Partners, an independent marketing and communications firm with 60 full-time professionals in its Silicon Valley and New York offices. Mr. Neale-May formed the firm in 1987 after running Ogilvy & Mather’s West Coast PR operations for five years.

Kelly M. Urso has served as a director since 1999. Since 2003, Ms. Urso has been a principal at K. M. Urso & Company, LLC. From 2001 to 2003, Ms. Urso was a tax attorney with Reynolds & Rowella LLP. From 1997 to 2001, Ms. Urso was the leader of the expatriate tax group at General Electric International, Inc. Ms. Urso holds a bachelor’s degree in business administration from the University of Cincinnati and a Juris Doctor degree from the Thomas M. Cooley Law School in Lansing, Michigan.

SHARE OWNERSHIP

(1) Except as otherwise indicated and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all their shares of common stock.

(2) For each person and group indicated in this table, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group by the sum of 15,250,479 shares of common stock outstanding as of March 31, 2007, plus the number of shares of common stock that such person or group had the right to acquire within 60 days after March 31, 2007.

(3) Holger Bartel indirectly holds 1% of TZOO Inc., which is the holder of 7,726,674 shares and options to purchase 2,193,349 shares, through HBT Corporation LLC. Includes options to purchase 21,933 shares which are currently exercisable or will be exercisable within 60 days of March 31, 2007.

(4) Ralph Bartel indirectly holds 99% of TZOO Inc., which is the holder of 7,726,674 shares and options to purchase 2,193,349 shares, through the Ralph Bartel 2005 Trust. Includes options to purchase 2,171,416 shares which are currently exercisable or will be exercisable within 60 days of March 31, 2007.

(5) Consists of options to purchase 17,725 shares which are currently exercisable or will be exercisable within 60 days of March 31, 2007.

(6) Includes options to purchase 2,211,074 shares which are currently exercisable or will be exercisable within 60 days of March 31, 2007.

(7) Based solely on information reported on a Schedule 13G filed with the Securities and Exchange Commission on February 9, 2007 by Prudential Financial, Inc. As of December 31, 2006, 967,131 shares were beneficially held by Prudential Financial, Inc. of which it possessed sole voting and dispositive power to 268,300 shares and shared voting and dispositive power to 698,831 shares.

(8) Based solely on information reported on a Schedule 13G filed with the Securities and Exchange Commission on January 23, 2007 by Barclays Global Investors, NA. As of December 31, 2006, 918,482 shares were beneficially held by Barclays Global Investors, NA and its affiliated entities of which it possessed sole voting power to 898,571 shares and dispositive power to 918,482 shares.

COMPENSATION

Directors who are employed by the Company or its subsidiaries do not receive compensation for serving as directors. Directors who are not employees of the Company or its subsidiaries are entitled to receive certain retainers and fees. On June 9, 2006, the Compensation Committee reviewed its director compensation policy and determined that adjustments were necessary in order for the Company to attract and retain qualified independent board members. Taking into consideration statistical information provided in the 2006 Director Compensation Report published by the National Association of Corporate Directors, the Compensation Committee adjusted the retainers and meeting fees as follows:


• Increase the annual board member retainer to $30,000 from $26,000;

• Increase the audit committee chair retainer to $30,000 from $26,000;

• Increase the fee for attendance of a board meeting to $1,680 from $1,500;

• Increase the fee for attendance of an Audit Committee meeting to $2,800 from $2,500;

• Increase the fee for attendance of a Disclosure Committee meeting to $1,680 from $1,500;

• Increase the fee for attendance of a Compensation Committee meeting to $2,800 from $2,500; and

• Increase the fee for attendance of a strategy meeting to $4,480 from $4,000.

We also reimburse non-employee directors for out-of-pocket expenses incurred in connection with attending meetings.


MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Travelzoo Inc. is an Internet media company. We publish travel offers from hundreds of travel companies. As the Internet is becoming consumers’ preferred medium to search for travel offers, we provide airlines, hotels, cruise lines, vacation packagers, and other travel companies with a fast, flexible, and cost-effective way to reach millions of users. While our products provide advertising opportunities for travel companies, they also provide Internet users with a free source of information on current sales and specials from hundreds of travel companies.

Our publications include the Travelzoo Web sites, the Travelzoo Top 20 e-mail newsletter, and the Newsflash e-mail product. We also operate SuperSearch, a pay-per-click travel search engine. More than 600 travel companies purchase our advertising services.

Our revenues are advertising revenues, consisting of listing fees paid by travel companies to advertise their offers on the Travelzoo Web sites, in the Travelzoo Top 20 e-mail newsletter, in the Newsflash e-mail product, and in SuperSearch, a pay-per-click travel search engine. Revenues are principally generated from the sale of advertising in the U.S. Listing fees are based on placement, number of listings, number of impressions, or number of clickthroughs. Smaller advertising agreements — typically $4,000 or less per month — typically renew automatically each month if they are not terminated by the client. Larger agreements are typically related to advertising campaigns and are not automatically renewed.

We have two operating segments based on geographic regions: North America and Europe. North America consists of our operations in the U.S. and Canada. Europe consists of our operations in the U.K., Germany and Spain. As of December 31, 2006, European operations were 5% of revenues.

When evaluating the financial condition and operating performance of the Company, management focuses on the following financial and non-financial indicators:


• Growth of number of subscribers of the Company’s newsletters and page views of the homepages of the Travelzoo Web sites;

• Operating margin;

• Growth in revenues in the absolute and relative to the growth in reach of the Company’s publications; and

• Revenue per employee as a measure of productivity.

Critical Accounting Policies

We believe that there are a number of accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving management’s judgments and estimates. These significant accounting policies relate to revenue recognition, the allowance for doubtful accounts, and liabilities to former stockholders. These policies, and our procedures related to these policies, are described in detail below.

Revenue Recognition

We recognize revenue on arrangements in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition.” We recognize advertising revenues in the period in which the advertisement is displayed, provided that evidence of an arrangement exists, the fees are fixed or determinable and collection of the resulting receivable is reasonably assured. If fixed-fee advertising is displayed over a term greater than one month, revenues are recognized ratably over the period as described below. The majority of insertion orders have terms that begin and end in a quarterly reporting period. In the cases where at the end of a quarterly reporting period the term of an insertion order is not complete, the Company recognizes revenue for the period by pro-rating the total arrangement fee to revenue and deferred revenue based on a measure of proportionate performance of its obligation under the insertion order. The Company measures proportionate performance by the number of placements delivered and undelivered as of the reporting date. The Company uses prices stated on its internal rate card for measuring the value of delivered and undelivered placements. Fees for variable-fee advertising arrangements are recognized based on the number of impressions displayed or clicks delivered during the period.

Under these policies, no revenue is recognized unless persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is deemed reasonably assured. The Company evaluates each of these criteria as follows:


• Evidence of an arrangement. We consider an insertion order signed by the client or its agency to be evidence of an arrangement.

• Delivery. Delivery is considered to occur when the advertising has been displayed and, if applicable, the click-throughs have been delivered.

• Fixed or determinable fee. We consider the fee to be fixed or determinable if the fee is not subject to refund or adjustment and payment terms are standard.

• Collection is deemed reasonably assured. We conduct a credit review for all transactions at the time of the arrangement to determine the creditworthiness of the client. Collection is deemed reasonably assured if we expect that the client will be able to pay amounts under the arrangement as payments become due. If we determine that collection is not reasonably assured, then we defer the revenue and recognize the revenue upon cash collection. Collection is deemed not reasonably assured when a client is perceived to be in financial distress, which may be evidenced by weak industry conditions, a bankruptcy filing, or previously billed amounts that are past due.

Revenues from advertising sold to clients through agencies are reported at the net amount billed to the agency.

Allowance for Doubtful Accounts

We record a provision for doubtful accounts based on our historical experience of write-offs and a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, management considers the age of the accounts receivable, our historical write-offs, the creditworthiness of the client, the economic conditions of the client’s industry, and general economic conditions, among other factors. Should any of these factors change, the estimates made by management will also change, which could impact the level of our future provision for doubtful accounts. Specifically, if the financial condition of our clients were to deteriorate, affecting their ability to make payments, additional provision for doubtful accounts may be required.

Liability to Former Stockholders

On October 15, 2004, we announced a program under which we would 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. We account for the cost of this program as an expense recorded in general and administrative expenses and a current accrued liability. The ultimate total cost of this program is not reliably estimable because it is based on the ultimate number of valid requests received and future levels of the Company’s common stock price. The Company’s common stock price affects the liability because the amount of cash payments under the program is based in part on the recent level of the stock price at the date valid requests are received. We do not know how many of the requests for shares originally received by Travelzoo.com Corporation in 1998 were valid. We believe that only a portion of such requests were valid. In order to receive payment under the program, a person is required to establish that such person validly held shares in Travelzoo.com Corporation.

Since the total cost of the program is not reliably estimable, the amount of expense recorded in a period is equal to the number of actual claims received during the period multiplied by (i) the number of shares held by each individual former stockholder and (ii) the applicable settlement price based on the recent price of our common stock at the date the claim is received as stipulated by the program. Requests are generally paid within 30 days of receipt. Please refer to Note 2 to the consolidated financial statements for further details about our liabilities to former stockholders.

Results of Operations

For the year ended December 31, 2006, we reported income from operations of approximately $29.8 million. As of December 31, 2006, we had retained earnings of approximately $34.6 million. Our operating margin increased to 42.8% for the year ended December 31, 2006 from 29.3% in 2005. The main reason for this increase in operating margin is that our sales and marketing expenses as a percentage of revenue did not increase at the same rate as our revenues due primarily to a decrease in marketing expenses as a result of a lower cost of acquiring new subscribers and fewer new subscribers acquired (see “Subscriber Acquisition” below). Another reason for this increase in our operating margin is that our general and administrative expenses as a percentage of revenue did not increase at the same rate as our revenues due primarily to a decrease in the number of requests received related to a program in which the Company intends to 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.

We do not know whether our sales and marketing expenses as a percentage of revenue will continue to decrease in future periods. Increased competition in our industry may require us to increase advertising for our brand and for our products. Increases in the average cost of acquiring new subscribers (see “Subscriber Acquisition” below) may result in an increase of sales and marketing expenses as a percentage of revenue. We may decide to accelerate our subscriber acquisition for various strategic and tactical reasons and, as a result, increase our marketing expenses. We may see a unique opportunity for a brand marketing campaign that will result in an increase of marketing expenses. Further, our strategy to replicate our business model in selected foreign markets (see “Growth Strategy” below) may result in a significant increase in our sales and marketing expenses and have a material adverse impact on our results of operations. We expect fluctuations of sales and marketing expenses as a percentage of revenue from quarter to quarter. Some of the fluctuations may be significant and have a material impact on our results of operations.

We do not know what our general and administrative expenses as a percentage of revenue will be in future periods. There may be fluctuations that have a material impact on our results of operations. 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 absolute general and administrative expenses to continue to increase. In addition, we expect that we will incur significant expenses in 2007 in order to allow management to report on, and our independent auditors to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”). At this time, the total cost is not reliably estimable as it will be dependent on the number of areas requiring improvement and the extent of any required remediation efforts as well as growth of our international operations. We expect our planned expansion into foreign markets to result in a significant additional increase in our general and administrative expenses. Our general and administrative expenses as a percentage of revenue may also fluctuate depending on the number of requests received related to a program under which the Company intends to 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.

Reach

The following table sets forth the number of subscribers of each of our e-mail publications in both North America and Europe as of December 31, 2006 and 2005 and the total number of page views for the homepages of the Travelzoo Web sites in North America for the years ended December 31, 2006 and 2005 and the number of page views for the homepage of the Travelzoo Web sites in Europe for the year ended December 31, 2006 and the period from November 9, 2005 to December 31, 2005. Management considers page views for the Travelzoo homepages as indicators for the growth of Web site traffic. Management reviews these non-financial metrics for two reasons: First, to monitor our progress in increasing the reach of our products. Second, to evaluate whether we are able to convert higher reach into higher revenues.

The Company’s revenues for North America for the year ended December 31, 2006 increased by 33% from the previous year. The number of subscribers of the Travelzoo Top 20 e-mail newsletter increased by 8% for North America and page views of the homepages of the Travelzoo North America Web sites increased by 7%. Management believes that the data for the years ended December 31, 2006 and 2005 shows that the Company was able to generate higher revenues as reach increased.

Revenues

Our total revenues increased to $69.5 million for the year ended December 31, 2006 from $50.8 million for the year ended December 31, 2005. This represents an increase of 37%. Total revenues for the year ended December 31, 2005 increased to $50.8 million from $33.7 million for the year ended December 31, 2004. This represented an increase of 51%.

13% of our revenue growth in the year ended December 31, 2006 compared to the year ended December 31, 2005 came from our operations in Europe. The remaining 87% came from our operations in North America (i.e. Travelzoo Web sites, Travelzoo Top 20 newsletter, Newsflash and SuperSearch ) and is attributed to an increase in our advertising rates for our existing products and an increase in the number of clients and the volume of advertising sold. Approximately 23% of our revenue growth in the year ended December 31, 2006 compared to the year ended December 31, 2005 is attributed to an increase in our advertising rates in North America for our existing products. Due to the increase in the reach of our publications, we increased the prices for advertising placements in our publications on average by approximately 13% as of January 1, 2006. Approximately 64% of our revenue growth in the year ended December 31, 2006 compared to the year ended December 31, 2005 is attributed to an increase in the number of clients in North America and an increase in the volume of advertising sold to existing clients in North America.

Approximately 68% of our revenue growth in the year ended December 31, 2005 compared to the year ended December 31, 2004 came from our new product, SuperSearch. Approximately 4% of our revenue growth came from our operations in Europe. The remaining 28% of our revenue growth came from our other products (i.e. Travelzoo Web sites, Travelzoo Top 20 newsletter, and Newsflash ) and is attributed to an increase in our advertising rates for our existing products and an increase in the number of clients and the volume of advertising sold.

As discussed in Note 7 to the accompanying consolidated financial statements, two clients accounted for 16% and 14% of our total revenues in the year ended December 31, 2006. In the year ended December 31, 2005, two clients accounted for 15% and 12% of our total revenues. In the year ended December 31, 2004, one client accounted for 12% of our total revenues. No other clients accounted for 10% or more of our total revenues during the years ended December 31, 2006, 2005, or 2004. The agreements with these clients are in the form of multiple insertion orders from groups of entities under common control. Management expects revenue concentration to remain at the current level in the foreseeable future because there is a high concentration in the online travel agency industry.

Management believes that our ability to increase revenues in the future depends mainly on three factors:


• 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.

Over the last three years we increased advertising rates as of January 1 of each year. We intend to increase advertising rates once a year as of January 1. However, there is no assurance that there will be increases of advertising rates. Depending on the level of competition in the industry and the condition of the online advertising market, we may decide not to increase our advertising rates.

Average revenue per employee increased to $848,000 for the year ended December 31, 2006 and $725,000 for the year ended December 31, 2005 from $678,000 for the year ended December 31, 2004.

Cost of Revenues

Cost of revenues consists primarily of network expenses, including fees we pay for co-location services, depreciation of network equipment, and salary expenses associated with network operations staff. Our cost of revenues increased to $1.0 million for the year ended December 31, 2006 and to $878,000 for the year ended December 31, 2005 from $695,000 for the year ended December 31, 2004. As a percentage of revenue, cost of revenues was 1% for the year ended December 31, 2006, down from 2% for the years ended December 31, 2005 and 2004. Cost of revenues as a percentage of revenues for the year ended December 31, 2006 decreased compared to the year ended December 31, 2005 because we did not need to increase our network operations staff significantly, and we did not have significant 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, 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 valid requests received and the Company’s stock price. The Company expects expenses related to the program to decrease in future periods due to the expected decrease in the number of actual valid requests received.

Subscriber Acquisition

The table set forth below provides for each quarter in 2004, 2005, and 2006, an analysis of our average cost for acquisition of new subscribers for our Travelzoo Top 20 newsletter and our Newsflash e-mail alert service for our operating segments, North America and Europe.

The table includes the following data:


• Average Cost per Acquisition of a New Subscriber: This is the quarterly costs of consumer marketing programs whose purpose was primarily to acquire new subscribers, divided by total new subscribers added during the quarter.

• New Subscribers: Total new subscribers who signed up for at least one of our e-mail publications throughout the quarter. This is an unduplicated subscriber number, meaning a subscriber who signed up for two or more of our publications is only counted once.

• Unsubscribes: Subscribers who were removed from our list throughout the quarter either as a result of their requesting removal, or based on periodic list maintenance after we determined that the e-mail address was likely no longer valid.

• Balance: This is the number of subscribers at the end of the quarter, computed by taking the previous quarter’s subscriber balance, adding new subscribers during the current quarter, and subtracting unsubscribes during the current quarter.

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.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

For the nine months ended September 30, 2007, we reported income from operations of approximately $18.2 million. As of September 30, 2007, we had retained earnings of approximately $43.6 million. Our operating margin decreased to 30.4% of revenues for the nine months ended September 30, 2007 from 42.6% for the same period last year. The main reason for this decrease in our operating margin is that our sales and marketing expenses as a percentage of revenue increased at a higher rate than our revenues primarily due to increases in advertising expenses and increases in salary expenses in the nine months ended September 30, 2007 compared to the same period last year (see “Operating Expenses” below).
We do not know whether our sales and marketing expenses as a percentage of revenue will continue to increase in future periods. Increased competition in our industry may require us to increase advertising for our brand and for our products. Increases in the average cost of acquiring new subscribers (see “Subscriber Acquisition” below) may result in an increase of sales and marketing expenses as a percentage of revenue. We may decide to accelerate our subscriber acquisition for various strategic and tactical reasons and, as a result, increase our marketing expenses. We may see a unique opportunity for a brand marketing campaign that will result in an increase of marketing expenses. Further, our strategy to replicate our business model in selected foreign markets (see “Growth Strategy” below) may result in a significant increase in our sales and marketing expenses and have a material adverse impact on our results of operations. We expect fluctuations of sales and marketing expenses as a percentage of revenue from quarter to quarter. Some of the fluctuations may be significant and have a material impact on our results of operations.
We do not know what our general and administrative expenses as a percentage of revenue will be in future periods. There may be fluctuations that have a material impact on our results of operations. 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 absolute general and administrative expenses to continue to increase. In addition, we expect that we will incur significant expenses in 2007 in order to allow management to report on, and our independent auditors to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002. At this time, the total cost is not reliably estimable as it will be dependent on the number of areas requiring improvement and the extent of any required remediation efforts as well as growth of our international operations. We expect our planned expansion into foreign markets to result in a significant additional increase in our general and administrative expenses. Our general and administrative expenses as a percentage of revenue may also fluctuate depending on the number of requests received related to a program under which the Company intends to make cash payments to people who establish that they were former stockholders of Travelzoo.com Corporation, and who failed to submit requests for shares in Travelzoo Inc. within the required time period.

Reach
The following table sets forth the number of subscribers of each of our e-mail publications in North America, Europe, and Asia Pacific as of September 30, 2007 and 2006 and the total number of page views for the homepages of the Travelzoo Web sites in North America, Europe, and Asia Pacific for the nine months ended September 30, 2007 and 2006. Management considers the page views for the Travelzoo homepages as indicators for the growth of Web site traffic. Management reviews these non-financial metrics for two reasons: First, to monitor the reach of our products. Second, to evaluate whether we are able to convert higher reach into higher revenues.

In North America, revenues for the nine months ended September 30, 2007 increased by 12% from the same period last year. The total number of subscribers in North America to the Travelzoo Top 20 e-mail newsletter as of September 30, 2007 increased by 8% compared to September 30, 2006 and page views of the homepages of the Travelzoo Web sites in North America for the nine months ended September 30, 2007 decreased by 17% from the same period last year. In North America, revenues increased at a higher rate than the rate of growth in reach.
In Europe, revenues for the nine months ended September 30, 2007 increased by 94% from the same period last year. The total number of subscribers in Europe to the Travelzoo Top 20 e-mail newsletter as of September 30, 2007 increased by 107% compared to September 30, 2006 and page views of the homepages of the Travelzoo Web sites in Europe for the nine months ended September 30, 2007 increased by 169% from the same period last year. In Europe, revenues increased at a lower rate than the rate of growth in reach. Management believes that the lower rate of growth in revenues is due to start up of operations in Germany and France. In Germany and France, we focused on rapidly building a significant subscriber base.
In the Asia Pacific, we did not generate any revenues in the nine months ended September 30, 2007 and 2006. We began operations in Hong Kong in April 2007 and in Japan in August 2007.
Revenues
Our total revenues increased to $19.9 million for the three months ended September 30, 2007 from $17.6 million for the three months ended September 30, 2006. This represents an increase of 13%. Our total revenues increased to $59.8 million for the nine months ended September 30, 2007 from $51.9 million for the nine months ended September 30, 2006. This represents an increase of 15%.

28% of our revenue growth in the three months ended September 30, 2007 compared to the three months ended September 30, 2006 came from our operations in Europe. The remaining 72% came from our operations in North America (i.e. Travelzoo Web sites, Travelzoo Top 20 newsletter, Newsflash, SuperSearch, and Travelzoo Network) and is attributed to an increase in our advertising rates for our existing products, an increase in the number of clients, an increase in the volume of advertising sold, and new product offerings. Approximately 27% of our revenue growth in the three month period ended September 30, 2007 compared to the three months ended September 30, 2006 is attributed to an increase in our advertising rates in North America for our existing products. Due to the increase in the reach of our publications, we increased the prices for advertising placements in our publications on average by approximately 6% as of January 1, 2007. Approximately 45% of our revenue growth in the three months ended September 30, 2007 compared to the three months ended September 30, 2006 is attributed to an increase in the number of clients in North America, an increase in the volume of advertising sold to existing clients in North America and from new product offerings in North America.
27% of our revenue growth in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 came from our operations in Europe. The remaining 73% came from our operations in North America (i.e. Travelzoo Web sites, Travelzoo Top 20 newsletter, Newsflash, SuperSearch, and Travelzoo Network) and is attributed to an increase in our advertising rates for our existing products, an increase in the number of clients, an increase in the volume of advertising sold, and new product offerings. Approximately 24% of our revenue growth in the nine month period ended September 30, 2007 compared to the nine months ended September 30, 2006 is attributed to an increase in our advertising rates in North America for our existing products. Due to the increase in the reach of our publications, we increased the prices for advertising placements in our publications on average by approximately 6% as of January 1, 2007. Approximately 49% of our revenue growth in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 is attributed to an increase in the number of clients in North America, an increase in the volume of advertising sold to existing clients in North America and from new product offerings in North America.
As discussed in Note 8 in the notes to the condensed financial statements, two clients each accounted for 10% or more of our total revenues during the three and nine months ended September 30, 2007 and September 30, 2006. No other clients accounted for 10% or more of our total revenues during the three and nine months ended September 30, 2007 and 2006. The agreements with these clients are in the form of multiple insertion orders from groups of entities under common control. Management expects revenue concentration to remain at the current level in the foreseeable future because there is a high concentration in the online travel agency industry.
Management believes that our ability to increase revenues in the future depends mainly on four factors:
• Our ability to increase our advertising rates;

• Our ability to sell more advertising to existing clients;

• Our ability to increase the number of clients;

• Our ability to develop new revenue streams; and

• Our ability to launch new products.
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 historically have increased the number of clients in every year since inception. We do not know if we will be able to increase the number of clients in the future. We do not know if we will have market acceptance of our new products.
Over the last three years we increased advertising rates as of January 1 of each year. We intend to increase advertising rates once a year as of January 1. However, there is no assurance that there will be increases of advertising rates. Depending on the level of competition in the industry and the condition of the online advertising market, we may decide not to increase our advertising rates.
Average annualized revenue per employee decreased to $623,000 for the three months ended September 30, 2007 from $868,000 for the three months ended September 30, 2006.
Cost of Revenues
Cost of revenues consists of network expenses, including fees we pay for co-location services, depreciation of network equipment, payments made to affiliate partners of the Travelzoo Network, and salary expenses associated with network operations staff. Our cost of revenues increased to $563,000 for the three months ended September 30, 2007 from $232,000 for the three months ended September 30, 2006. Our cost of revenues increased to $1.4 million for the nine months ended September 30, 2007 from $782,000 for the nine months ended September 30, 2006. As a percentage of revenue, cost of revenues increased to 3% for the three months ended September 30, 2007 from 1% for the three months ended September 30, 2006. As a percentage of revenue, cost of revenues remained the same, 2%, for the nine months ended September 30, 2007 and 2006. The $331,000 increase in cost of revenues in the three months ended September 30, 2007 compared to the three months ended September 30, 2006 was primarily due to an increase in salary expense associated with our network operations staff and payments made to affiliate partners of the Travelzoo Network. The $578,000 increase in cost of revenues in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 was also primarily due to an increase in salary expense associated with our network operations staff and payments made to affiliate partners of the Travelzoo Network.
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 increased to $11.0 million for the three months ended September 30, 2007 from $7.0 million for the three months ended September 30, 2006. Sales and marketing expenses increased to $31.0 million for the nine months ended September 30, 2007 from $22.0 million for the nine months ended September 30, 2006. The goal of our advertising was to acquire new subscribers for our e-mail products, increase the traffic to our Web sites, and to increase brand awareness for Travelzoo. The $4.0 million increase in sales and marketing expenses in the three months ended September 30, 2007 compared to the three months ended September 30, 2006 was primarily due to a $1.5 million increase in advertising to acquire new subscribers for our e-mail products, a $1.0 million increase in salary and employee related expenses due primarily to an increase in the headcount of our sales and marketing staff, and an $834,000 increase in advertising to acquire traffic to our Web site. For the three months ended September 30, 2007 and 2006, advertising expenses account for 69% and 70%, respectively, of sales and marketing expenses. The $9.0 million increase in sales and marketing expenses in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 was primarily due to a $2.7 million increase in advertising to acquire traffic to our Web site, a $2.5 million increase in advertising to acquire new subscribers for our e-mail products, and a $2.4 million increase in salary and employee related expenses due primarily to an increase in the headcount of our sales and marketing staff. For the nine months ended September 30, 2007 and 2006, advertising expenses accounted for 68% and 70%, respectively, of sales and marketing expenses.
Our goal is to increase our revenues from advertising sales. One important factor that drives our revenues is 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. One significant 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 2006, we began operations in Germany, Canada, and Spain. In the second quarter of 2007, we began operations in France and Hong Kong. In the third quarter of 2007, we began operations in Japan. In the fourth quarter of 2007, we expect to begin operations in Taiwan, China, and Australia. The start-up of our business in Europe, Canada, and Asia Pacific 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, amortization of intangible assets and general office expense. General and administrative expenses increased to $3.5 million in the three months ended September 30, 2007 from $2.2 million in the three months ended September 30, 2006. General and administrative expenses increased to $9.3 million in the nine months ended September 30, 2007 from $7.0 million for the nine months ended September 30, 2006. The $1.2 million increase in general and administrative expenses in the three months ended September 30, 2007 compared to the three months ended September 30, 2006 was primarily due to a $507,000 increase in salary and employee related expenses due primarily to an increase in headcount, a $308,000 increase in rent and office expenses, and a $171,000 increase in professional services expenses. The $2.3 million increase in general and administrative expenses in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 was primarily due to a $970,000 increase in salary and employee related expenses due primarily to an increase in headcount, a $652,000 increase in rent and office expenses and a $462,000 increase in professional services expense.

CONF CALLS

Ralph Bartel
Thank you, Operator. Good afternoon and thank you all for joining us today for Travelzoo's first quarter 2008 financial results conference call. I am Ralph Bartel, Chairman and Chief Executive Officer. With me today is Wayne Lee, the company’s Chief Financial Officer; C. J. Kettler, President, North America; and Chris Loughlin, Executive Vice President Europe.
Wayne Lee
Hello, everyone. Welcome to our conference call.
C. J. Kettler
Good afternoon, everyone.
Christopher Loughlin
Welcome, everyone.
Ralph Bartel
Before we begin, Wayne will walk you through today’s format.
Wayne Lee
First, we will discuss the company’s first quarter 2008 financial results. Then we will provide additional information on the company’s growth in subscribers and growth strategy. We will then conclude with a question-and-answer session.
Before we discuss the company’s financial results released earlier today, I would like to remind you that all statements made during this conference call that are not statements of historical fact constitute forward-looking statements and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could vary materially from those contained in the forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements are described in our forms 10-K and 10-Q and other periodic filings with the SEC.
An archived recording of this conference call will be available on the Travelzoo investor relations website at www.travelzoo.com/ir, beginning approximately 90 minutes after the conclusion of this call.
I will now turn to Ralph for an overview of the company’s Q1 2008 results.
Ralph Bartel
Today Travelzoo announced its results for the first quarter of 2008. Diluted loss per share for Q1 2008 was $0.07, down from diluted earnings per share of $0.25 in the prior year period. Our financial results were impacted by non-tax deductible losses from our foreign operations in Asia-Pacific and Europe, resulting in an effective income tax rate for Travelzoo of 164%.
Our revenue increased to $20.9 million in Q1 2008, an increase of 6% over revenue of $19.7 million in the same period last year.
Quarterly sequential revenue increased 10% from Q1 2008 to Q1 2008. The publications and products that contributed to our revenue are the Travelzoo websites in Australia, Canada, France, Germany, Hong Kong, Japan, the U.K., and the U.S.; the Travelzoo network in the U.S.; the top 20 newsletters in Canada, France, Germany, Hong Kong, Japan, the U.K. and the U.S.; the Newsflash alert services in Canada, the U.K. and the U.S.; and Super Search in the U.K. and in the U.S.
The Travelzoo websites in Taiwan and China did not generate any revenue in Q1 2008.
Our publications and products provide latest and reliable information on the very best travel offers from hundreds of travel companies. Super Search is a travel search tool that leverages more than 2.7 million ratings from Travelzoo users and makes it very easy for users to find the websites from suppliers that offer the best prices and connections for specific dates. The Travelzoo Network is a network of third-party websites that lists travel deals published by Travelzoo.
I will turn now to Wayne to discuss additional information for the group and for our three business segments, North America, Asia-Pacific, and Europe, including headcount, expenses, and operating income.
Wayne Lee
Thank you, Ralph. Our North America business segment revenue in Q1 2008 was $18.9 million, an increase of 2% year over year. Our Europe business segment revenue in Q1 2008 was $2 million, an increase of 59% year over year. Our new Asia-Pacific business segment generated $20,000 of revenue in Q1 2008.
In terms of revenue concentration, Travelzoo had one group of advertisers under common control that accounted for 12% of revenue in Q1 2008. No other group of advertisers accounted for 10% or more of revenue.
Travelzoo's operating income in Q1 2008 was $1.3 million, a decrease of 83% compared to Q1 2007 operating income of $7.5 million. Operating margin in Q1 2008 was 6.1%, down from 37.9% in Q1 2007. Travelzoo's net loss in Q1 2008 was $1 million, down from Q1 2007 net income of $4.1 million. Reported net income was negatively impacted by an increase in our effective income tax rate.
Travelzoo's effective income tax rate in Q1 2008 was 164.2% compared to 98.3% in Q4 2007 and 48.2% in Q1 2007. The increase in our effective tax rate compared to Q4 2007 and Q1 2007 was due primarily to the increase in the losses from our Asia-Pacific and Europe business segments. For financial reporting purposes, the $4.8 million in losses from our Asia-Pacific and Europe business segments were treated as having no recognizable tax benefit.
Cash provided by operations in Q1 2008 was $3.6 million.
DSOs, that’s days sales outstanding, as of March 31, 2008 was 49 days, unchanged from December 31, 2007.
Total cash and cash equivalents as of March 31, 2008 increased to $24.4 million from $22.6 million as of December 31, 2007.
In terms of headcount, Travelzoo had 178 employees as of March 31, 2008, up from 94 employees as of March 31, 2007 and up from 157 employees as of December 31, 2007. As of March 31, 2008, 101 of our employees were in North America, 38 employees were in Asia-Pacific, and 39 employees were in Europe.
Average annualized revenue per employee in Q1 2008 was $471,000, down from $840,000 in the same period last year.
Let’s now look at the expense line items of our three business segments. In North America, our largest expense item continues to be sales and marketing, consisting primarily of advertising and promotional expenses and salary expenses associated with sales and marketing staff.
Total sales and marketing expense in Q1 2008 was $8.6 million, up from $7.9 million in Q1 2007 and up from $7.6 million in Q4 2007. Sales and marketing expenses as a percentage of revenue increased to 45.6% in Q1 2008 from 42.5% in Q1 2007. The increase from Q1 2007 was primarily due to increased spending on marketing for SuperSearch, increased spending on brand, trade, and other marketing campaigns, and increased salary expenses, offset by decreased spending on subscriber acquisition campaigns. The increase from Q4 2007 was primarily due to increased spending on marketing for SuperSearch and increased spending on subscriber acquisition campaigns.
In North America, general and administrative expense was $3.3 million in Q1 2008, up from $2.2 million in Q1 2007 and up from $3.2 million in Q4 2007. The increase from Q1 2007 was primarily due to the $482,000 increase in salary expenses and a $312,000 increase in rent and office expenses.
North America operating income for Q1 2008 was $6.3 million, down from $8.2 million for the same period last year.
Operating margin for Q1 2008 was 33.1%, compared to 44.1% for the same period last year.
For our Asia-Pacific business segment, which consists of our operations in Australia, China, Hong Kong, Japan, and Taiwan, total sales and marketing expense in Q1 2008 was $1.6 million, up from $688,000 in Q4 2007.
Total general and administrative expense in Q1 2008 was $1.1 million, compared to $1.3 million in Q4 2007. The increase sales and marketing expense was due primarily to a $705,000 increase in spending on subscriber acquisition campaigns and a $216,000 increase in salary expenses.
Travelzoo began operations in Hong Kong in April 2007, in Japan in September 2007, in China in October 2007, and in Australia and Taiwan in December 2007.
Our Asia-Pacific business segment incurred an operating loss of $2.7 million in Q1 2008, compared to an operating loss of $2.1 million in Q4 2007.
In Europe, our largest expense item continues to be sales and marketing, consisting primarily of advertising and promotional expenses and salary expenses associated with sales and marketing staff.
Total sales and marketing expense in Q1 2008 was $3.1 million, up from $1.5 million in Q1 2007 and up from $2.1 million in Q4 2007. The increase from Q1 2007 was primarily due to a $793,000 increase in spending on subscriber acquisition campaigns, a $398,000 increase in salary expense, and a $338,000 increase in spending on search advertising. The increase from Q4 2007 was primarily due to a $444,000 increase in spending on subscriber acquisition campaigns, a $301,000 increase in spending on search advertising, and a $152,000 increase in salary expense.
In Europe, total general and administrative expense in Q1 2008 was $1.1 million, up from $469,000 in Q1 2007 and down slightly from $1.2 million in Q4 2007. The increase from Q1 2007 was primarily due to increases in salary expenses, rent and office expenses, and professional services expense.
Travelzoo began operations in France in March 2007. Our Europe business segment incurred an operating loss of $2.2 million in Q1 2008, compared to an operating loss of $683,000 in Q1 2007. Though revenues increased by $761,000, the operating loss increased as both sales and marketing and general and administrative expenses increased.
This concludes our discussion of Travelzoo's Q1 2008 financial results. We will turn back now to Ralph who will provide more information on the growth of our reach and our growth strategy.
Ralph Bartel
Thank you, Wayne. During Q1 2008, Travelzoo added a total of 1.1 million new subscribers to its e-mail publications. In North America, we acquired 297,000 subscribers at an average cost of $4.97 per subscriber in Q1 2008, compared to 280,000 subscribers at an average cost of $3.78 in Q4 2007.
In North America, Travelzoo's Top 20 Newsletter and Newsflash e-mail alert service had a net unduplicated total of 11 million subscribers as of March 31, 2008. This represents an increase of 4% versus the same time last year, while revenues increased 2% year over year.
In Asia-Pacific, we acquired 393,000 subscribers at an average cost of $3.12 in Q1 2008, compared to 180,000 subscribers at an average cost of $2.90 per subscriber in Q4 2007.
Travelzoo's Top 20 Newsletter and Newsflash e-mail alert service had a net unduplicated total of 582,000 subscribers as of March 31, 2008.
In Europe, we acquired 362,000 subscribers at an average cost of $3.90 per subscriber in Q1 2008, compared to 166,000 subscribers at an average cost of $5.85 in Q4 2007.
In Europe, Travelzoo's Top 20 Newsletter and Newsflash e-mail alert service had a net unduplicated total of 1.7 million subscribers as of March 31, 2008, an increase of 117% versus the same time last year.
The costs of our subscriber acquisition in North America, Asia-Pacific, and Europe are expensed as incurred.
In 2005, Travelzoo began its growth strategy of expanding into selected international markets. With the launch of the Travelzoo brand in several markets in Asia-Pacific and in France in 2007, we are executing this strategy according to our plan. The strategy consumes significant financial and management resources. However, we believe that going global represents an effective opportunity to increase shareholder value in the long-term. Markets in Asia-Pacific and Europe are new revenue opportunities for Travelzoo.
We see a competitive advantage from being able to cross-sell advertising globally. For example, our sales force in the U.S. now sells inclusions for our U.K. and Canadian publications, while our sales forces in Europe and Asia-Pacific also sell inclusions for our U.S. and Canadian publications.
Another competitive advantage is our improved ability to source the best travel deals and perform a very high quality review by leveraging the local expertise. Over the last two years, we have built a unique global network of producers and sales staff in 11 countries -- Australia, Canada, China, Germany, Hong Kong, France, Japan, Spain, Taiwan, U.K., and the U.S. Our plan is to aggressively leverage this global network to bring Travelzoo users the very best information available.
In 2008, we also plan to expand the Travelzoo network, a network of third-party websites that list travel deals published by Travelzoo. Further, we plan to expand our shows and events section. Finally, we plan to launch the next generation of SuperSearch.
This concludes the discussion of the financial results, the growth in subscribers, and our growth strategy.
Travelzoo's consistent practice is not to provide guidance for future periods because of the dynamics of the industry.

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