Travelzoo 10-Q Summary: Second Quarter 2023
Reporting period: Three and six months ended June 30, 2023; comparable periods are the three and six months ended June 30, 2022. The financial statements are unaudited. Travelzoo is a global Internet media company serving approximately 30 million members through travel, lifestyle and local-deal media properties, including Jack’s Flight Club, which Travelzoo owns 60% of.
Financial Performance and Liquidity
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Revenue | $21.1 million | $17.7 million | $42.7 million | $36.1 million |
| Gross profit | $18.2 million | $15.5 million | $37.2 million | $31.1 million |
| Gross margin | 86.4% | 87.8% | 87.0% | 86.2% |
| Operating income | $3.3 million | $1.8 million | $8.0 million | $3.7 million |
| Operating margin | 15.5% | 10.1% | 18.7% | 10.2% |
| Net income attributable to Travelzoo | $2.6 million | $1.0 million | $6.3 million | $3.4 million |
| Diluted earnings per share | $0.17 | $0.08 | $0.40 | $0.27 |
| Income from continuing operations | $2.7 million | $1.0 million | $6.3 million | $3.4 million |
- Revenue growth: Q2 revenue increased 19.5% year over year; six-month revenue increased 18.2%. Travel revenue grew to $19.0 million in Q2 from $15.5 million, while Local revenue declined to $1.0 million from $1.2 million.
- Cash flow: Operating cash flow was $5.7 million for the first six months, compared with cash usage of $17.0 million in the prior-year period. The improvement was driven partly by changes in merchant payables and other working-capital accounts.
- Cash and liquidity: Cash and cash equivalents were $19.5 million at June 30, 2023, plus $675,000 of restricted cash. Total cash, cash equivalents and restricted cash were $20.2 million, up $819,000 from December 31, 2022.
- Working capital: Current assets were $32.0 million and current liabilities were $36.2 million, resulting in negative working capital of approximately $4.3 million. Merchant payables were $23.9 million, primarily related to unredeemed vouchers.
- Debt and lease obligations: The filing does not report conventional borrowings or debt. Operating lease liabilities totaled $9.9 million, including $2.4 million current and $7.5 million long term.
- Equity: Total stockholders’ equity was $11.1 million at June 30, 2023, compared with $8.9 million at December 31, 2022. Travelzoo repurchased 693,625 shares during the first six months for $4.9 million and completed its prior repurchase authorization.
Material Changes Versus the Prior Comparable Period
- North America revenue increased 14.2% in Q2 to $14.1 million, primarily from higher Top 20 and standalone advertising revenue. North America operating profit increased to $3.8 million from $3.3 million.
- Europe revenue increased 35.2% in Q2 to $5.9 million, primarily from higher Top 20 and standalone revenue. Europe’s operating loss narrowed to $239,000 from $1.5 million; Europe generated $218,000 of operating profit for the six-month period versus a $1.3 million loss in 2022.
- Jack’s Flight Club revenue increased 15.0% in Q2 to $1.1 million, reflecting higher premium membership. Operating profit declined to $97,000 from $161,000 due primarily to increased advertising and marketing costs.
- New Initiatives, including Travelzoo licensing and Travelzoo META, generated only $13,000 of Q2 revenue and incurred a $338,000 operating loss, compared with a $180,000 loss in the prior-year quarter.
- Sales and marketing expense increased 19.6% in Q2 and 13.9% for the first six months, driven by higher member acquisition costs, headcount-related expenses and marketing spending.
- General and administrative expense declined 10.3% in Q2 and 7.9% for the first six months, primarily due to lower salary and stock-based compensation expense.
- Other income included a $205,000 German government pandemic-relief grant in Q2 2023. The prior-year six-month period included approximately $1.2 million of comparable German funding, resulting in lower other income for the first six months of 2023 despite the improved operating result.
- Consolidated total members increased modestly to 27.6 million from 27.4 million. Jack’s Flight Club members increased to 2.2 million from 1.8 million, while North America members declined to 16.2 million from 16.5 million.
Outlook, Risks, Contingencies and Unusual Items
- Outlook: The filing provides no formal revenue, earnings or cash-flow guidance. Management expects cash on hand to fund working-capital needs for at least twelve months based on current redemption and operating projections.
- Voucher obligations: Approximately $6.0 million of unredeemed vouchers had been sold through June 30, 2023, with an estimated refund liability of $572,000. Most voucher expiration dates fall in 2023, although dates may be extended and merchant payments may be delayed for up to a year after expiration.
- Liquidity risk: Accelerated voucher redemptions, weaker profitability or failure to meet operating cash-flow targets could require additional financing. Management states that financing may not be available on acceptable terms.
- Shareholder note receivable: Azzurro Capital, a related party and the company’s largest shareholder, had not paid the $4.8 million principal of a promissory note due June 30, 2023. Azzurro paid $285,000 of interest, and Travelzoo is negotiating a payment plan. If satisfactory terms are not reached, Travelzoo may pursue the pledged shares.
- Related-party concentration: Azzurro held approximately 48.9% of outstanding shares at June 30, 2023; Global CEO Holger Bartel, who is Ralph Bartel’s brother, held approximately 3.4%.
- Tax contingencies: Unrecognized tax benefits totaled approximately $16.9 million, with accrued interest and penalties of approximately $602,000. Management also disclosed approximately $17.5 million of total contingencies related to unrecognized tax benefits, interest and penalties.
- Internal controls: Disclosure controls were deemed ineffective because of a material weakness involving insufficient internal expertise and resources for unusual or complex transactions. Management is implementing a remediation plan, but the weakness had not been fully remediated at June 30, 2023.
- Government funding: Travelzoo Germany received approximately $205,000 of pandemic-relief funding in May 2023. A final declaration is due by December 31, 2023; management does not expect a significant change to the amount received.
- Legal and other contingencies: The company reports no material accrued legal contingencies and believes material adverse outcomes from pending claims are remote, while noting that litigation outcomes remain uncertain. Purchase commitments totaled approximately $617,000.
- Subsequent event: On July 26, 2023, the board authorized a new repurchase program for up to 1.0 million shares, funded from available cash.
Key Facts for Investors to Verify
- Whether higher advertising revenue and member acquisition spending can be sustained without materially reducing margins.
- The timing and collectability of the $4.8 million related-party note receivable from Azzurro Capital.
- Voucher redemption timing, merchant-payable settlements and the adequacy of the $572,000 refund reserve.
- Progress in remediating the material weakness in internal control over financial reporting.
- The commercial traction and cash requirements of Travelzoo META and other New Initiatives, which remained loss-making with minimal revenue.
- The potential cash impact of approximately $16.9 million of unrecognized tax benefits and related interest and penalties.
- Whether the new 1.0 million-share repurchase program is consistent with liquidity needs given negative working capital and substantial merchant payables.