TZOO

Business Context and Reporting Period

Company: Travelzoo Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: Travelzoo is a global Internet media company providing travel, entertainment, and local deal information to over 23 million subscribers. Revenue is primarily generated through advertising fees and a percentage of voucher sales from its "Local Deals" service. The company operates in two segments: North America and Europe.

Key Financial Metrics

Liquidity and Debt: The company reported no outstanding debt as of March 31, 2011. Cash and cash equivalents increased to $51.7 million from $41.2 million at the end of 2010. Total current liabilities were $45.3 million, driven significantly by a $20.0 million accrued settlement liability.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 30% year-over-year to $37.0 million. North America revenue grew 23%, while Europe revenue surged 53% (49% in local currency), aided by a stronger U.S. dollar.
• Profitability Decline: The company reported a net loss of $14.0 million compared to a net income of $2.5 million in the prior year. This reversal was primarily due to a one-time non-recurring expense.
• Unusual Item: A $20.0 million charge was recorded for a settlement with the State of Delaware regarding an unclaimed property review related to unissued shares from a 2002 merger. This charge was recorded in operating expenses.
• Operating Expenses: Total operating expenses rose to $44.5 million from $21.7 million. Excluding the Delaware settlement, operating expenses increased due to higher sales and marketing costs (driven by headcount) and general and administrative costs (professional services and rent).

Guidance, Outlook, and Risks

Management Commentary: Management highlighted strong subscriber growth in Europe (28% increase in Top 20 subscribers) and North America (6% increase). However, page views in North America declined 6% year-over-year. The company expects to continue expanding internationally and launching new products, which may increase operating expenses.

Outlook: The company believes cash on hand ($51.7 million) is sufficient for working capital needs for at least the next 12 months. However, future profitability is not assured due to potential increases in subscriber acquisition costs and competitive pressures.

Risks and Contingencies:

• Unclaimed Property Liability: While the $20 million settlement resolves the Delaware claim, the company continues a program to pay former stockholders of Travelzoo.com Corporation. The total cost of this program is not reliably estimable as it depends on future stock prices and the number of valid claims.
• International Expansion: European operations, while profitable in Q1 2011, have historically incurred losses. Future losses in Europe may not provide tax benefits.
• Competition: Intense competition from portals, search engines, and local deal sites (e.g., Groupon) could pressure advertising rates and margins.

Investor Verification Checklist

• Delaware Settlement Impact: Verify the finality of the $20 million settlement and assess the potential for future claims from former stockholders under the ongoing cash payment program.
• Subscriber Quality vs. Quantity: Investigate the disconnect in North America where subscriber counts grew 6% but homepage page views declined 6%, and how this impacts future ad rate increases.
• European Profitability Sustainability: Monitor whether the Q1 2011 operating profit in Europe ($741k) is sustainable given the history of losses in that region and high subscriber acquisition costs.
• Cash Burn vs. Revenue Growth: Confirm that the $10.7 million operating cash flow is sufficient to cover the $20 million settlement payment (made in April 2011) and ongoing expansion costs without requiring dilutive financing.