Travelzoo 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
Travelzoo provides travel, entertainment and lifestyle deals through websites, mobile applications, email publications, the Travelzoo Network, Local Deals, Getaways and hotel-booking products. Revenue is generated primarily from advertising and transaction-based fees. The company operates in Asia Pacific, Europe and North America.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Travelzoo reported approximately 30.3 million members and had 11.7 million shares outstanding as of October 25, 2019. Azzurro Capital, associated with founder Ralph Bartel, held approximately 47.0% of outstanding shares and 49.1% of voting power through a proxy.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $25.5 million | $25.3 million | $84.5 million | $84.3 million |
| Gross profit | $22.5 million | $22.3 million | $75.8 million | $74.9 million |
| Gross margin | 88.3% | 88.2% | 89.7% | 88.9% |
| Income from operations | $1.2 million | $0.7 million | $8.6 million | $5.4 million |
| Operating margin | 4.7% | 2.8% | 10.1% | 6.5% |
| Net income | $0.3 million | $0.1 million | $4.8 million | $3.1 million |
| Diluted EPS | $0.03 | $0.01 | $0.39 | $0.25 |
For the nine months, operating cash flow was $1.9 million versus $36,000 in 2018. Investing cash outflow was $1.0 million, including a $673,000 investment in WeekenGO and $350,000 of capital expenditures. Financing cash outflow was $7.1 million, primarily reflecting $8.8 million of share repurchases, partially offset by $1.7 million from stock-option exercises and related share settlement activity.
Cash and cash equivalents were $11.6 million at September 30, 2019, down from $18.0 million at December 31, 2018. Including restricted cash, total cash, cash equivalents and restricted cash was $12.9 million. The company stated that cash on hand should fund working-capital needs for at least the next twelve months.
No traditional borrowings or debt were reported. Operating lease liabilities totaled $19.3 million, including $7.0 million current and $12.3 million long term, following adoption of ASC 842. Current assets were $27.0 million and current liabilities were $28.5 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 0.8% in Q3 and 0.3% for the nine months. Travel revenue increased to $22.2 million in Q3 and $74.0 million for the nine months, while Local revenue declined to $3.3 million and $10.5 million, respectively.
- Asia Pacific revenue declined 15.8% in Q3 and 19.0% for the nine months, and its operating loss widened to $2.1 million and $5.5 million, respectively.
- Europe revenue increased modestly, while North America revenue increased 2.7% in Q3 and 1.6% for the nine months. North America operating profit increased to $2.5 million in Q3 and $10.5 million for the nine months.
- Sales and marketing expense increased 6.4% in Q3 and 1.5% for the nine months, primarily because of higher member-acquisition costs. Advertising expenses represented 19% of sales and marketing expense in Q3 versus 11% in the prior-year quarter.
- Product development expense declined 35.6% in Q3 and 30.8% for the nine months, primarily due to lower employee-related costs and reduced headcount. General and administrative expense also declined.
- Net income and operating margin improved despite essentially flat revenue, reflecting lower product development and other operating costs.
- The company repurchased 186,369 shares for $2.3 million during Q3 and 436,369 shares for $7.2 million under its 2019 repurchase program. A separate February transaction repurchased 100,000 shares from Azzurro for $1.6 million.
- Travelzoo adopted the lease accounting standard on January 1, 2019, recognizing approximately $13.4 million of operating lease right-of-use assets and $16.0 million of lease liabilities at adoption, with no restatement of prior periods.
Guidance, Outlook, Commentary and Risks
The filing does not provide quantitative revenue or earnings guidance. Management expects continued investment in audience acquisition, mobile and social-media capabilities, international operations, new advertising formats and the hotel platform. Management also expects fluctuations in cost of revenues, sales and marketing, product development, general and administrative expense and effective tax rates.
- Local revenue has declined due to lower voucher volumes and lower merchant take rates. Management expects competition and reduced consumer demand for vouchers to remain factors.
- Management anticipates a shift toward commission-based hotel revenue, which may produce lower revenue depending on booking volume.
- WeekenGO, in which Travelzoo increased its ownership to 26.6%, is seeking additional capital. Failure to obtain funding could create liquidity risk for WeekenGO and impair Travelzoo’s $2.6 million investment. Travelzoo recorded $732,000 of WeekenGO-related losses and basis-difference amortization for the nine months.
- Asia Pacific remains materially unprofitable, with a nine-month operating loss equal to 111.2% of segment revenue.
- Key risks include intense competition from major online travel, search, metasearch and local-deal platforms; changes in search-engine algorithms and traffic costs; technology or user-interface changes; data privacy and cookie regulation; foreign-exchange movements; travel-industry disruptions; Brexit-related uncertainty; and broader regulatory changes.
- The company maintains a voluntary cash program for certain former Netsurfers promotional shareholders. Future cost cannot be reliably estimated and depends on valid claims and the company’s stock price. Cumulative expense to date was $2.9 million.
- Cash held outside the United States totaled approximately $8.7 million and could be subject to additional U.S. taxes if repatriated in certain circumstances.
- The company identified no material changes to internal control over financial reporting and concluded that disclosure controls were effective as of September 30, 2019.
Important Facts for Investors to Verify
- Whether the improvement in profitability is sustainable after lower product-development and other cost reductions, particularly as member-acquisition spending increases.
- The operating plan and funding outlook for Asia Pacific, including the possibility of further losses or restructuring.
- WeekenGO’s financing progress and the recoverability of Travelzoo’s investment.
- The remaining authorization and pace of share repurchases, including transactions involving the controlling shareholder.
- The effect of ASC 842 lease liabilities on leverage, cash commitments and future operating flexibility.
- Trends in Travel revenue, Local revenue, member acquisition cost, revenue per member and mobile engagement.
- Potential exposure from the Netsurfers program, uncertain tax positions, foreign-currency movements and international regulatory changes.