Travelzoo Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017. The filing is unaudited. Travelzoo is a global publisher of travel, entertainment and local offers, generating primarily advertising revenue across Asia Pacific, Europe and North America. In the first quarter of 2017, the Company discontinued SuperSearch and Fly.com to focus on the Travelzoo brand.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $24.7 million | $26.8 million | $79.5 million | $87.5 million |
| Gross profit | $21.7 million | $23.6 million | $70.1 million | $76.9 million |
| Gross margin | 87.8% | 87.8% | 88.1% | 87.9% |
| Operating income from continuing operations | $18 thousand | $1.9 million | $3.5 million | $8.2 million |
| Operating margin | 0.1% | 7.0% | 4.4% | 9.4% |
| Net income (loss) | $(576) thousand | $1.6 million | $2.9 million | $5.7 million |
| Diluted earnings per share | $(0.05) | $0.12 | $0.22 | $0.40 |
| Operating cash flow | Not provided for the quarter | $(1.9) million | $1.9 million |
Q3 revenue declined approximately 8.0%, while nine-month revenue declined approximately 9.1%. Travel revenue declined to $20.8 million in Q3 and $67.9 million for nine months; local revenue declined to $3.8 million and $11.6 million, respectively. Declines were primarily attributed to fewer emails sent, lower paid clicks, fewer Getaway vouchers and fewer Local Deals vouchers sold.
Sales and marketing expense was $14.0 million in Q3 and $43.5 million for nine months. Product development expense was $2.3 million and $7.0 million, while general and administrative expense was $5.4 million and $16.1 million. The resulting expense structure compressed operating margins despite largely stable gross margins.
Cash and cash equivalents were $18.8 million at September 30, 2017, down from $26.8 million at December 31, 2016. Approximately $11.4 million was held outside the United States. The balance sheet shows no debt balance; the related-party loan was repaid in 2016. Management stated that cash on hand should fund working-capital needs for at least the next twelve months.
Material changes versus the prior comparable period
- Continuing-operations net income fell from $1.4 million to a $576 thousand loss in Q3 and from $5.0 million to $917 thousand for nine months.
- Operating income declined substantially, driven by lower revenue and operating expenses that remained high relative to revenue.
- The effective tax rate increased to 654% in Q3 and 74% for nine months, compared with 34% and 40%, respectively, primarily because of geographic mix and foreign losses without tax benefits.
- Operating cash flow changed from $1.9 million provided in the first nine months of 2016 to $1.9 million used in 2017, principally reflecting working-capital changes and taxes paid.
- Travelzoo received $2.9 million from selling the Fly.com domain name and recorded a $2.9 million gain within discontinued operations during the first nine months of 2017.
- The Company repurchased approximately 996,705 shares for about $9.7 million during the first nine months and had approximately 3,295 shares remaining under the February 2017 authorization at September 30.
- Member count increased modestly to 29.5 million from 29.1 million, but consolidated revenue per member declined to $3.68 from $4.11 on an annualized basis.
Segment performance and outlook
| Segment | Q3 2017 revenue | Q3 operating result | 9M 2017 revenue | 9M operating result |
|---|---|---|---|---|
| Asia Pacific | $1.8 million | $(1.7) million | $5.5 million | $(4.4) million |
| Europe | $7.9 million | $309 thousand | $24.9 million | $1.5 million |
| North America | $15.0 million | $1.4 million | $49.1 million | $6.3 million |
The filing provides no specific revenue or earnings guidance. Management expects continued investment in audience acquisition, product development, mobile offerings and the hotel booking platform. It also expects fluctuations in revenue, expenses and tax rates, and cautions that local voucher demand, competition, advertiser spending and mobile adoption may affect future results.
Key business risks include declining voucher demand, pressure from online travel and advertising competitors, dependence on email and third-party traffic sources, execution risk in the hotel platform, international operating losses and foreign-exchange exposure. A hypothetical 10% adverse currency movement would have produced an estimated $141 thousand incremental foreign-exchange loss for the nine months ended September 30, 2017.
Contingencies and unusual items
- The IRS Revenue Agent’s Report concerning the 2009 sale of the Asia Pacific business proposes additional federal tax, penalties and state tax expense of approximately $31.0 million, excluding interest and possible state penalties. Travelzoo disputes the proposed adjustment and recorded no additional liability for it.
- Unrecognized tax benefits were approximately $1.6 million, with accrued interest and penalties of approximately $985 thousand. Total tax-related contingencies, including interest, were approximately $2.6 million.
- Contractual commitments totaled approximately $25.2 million, consisting of $23.9 million of operating leases and $1.3 million of purchase obligations.
- The voluntary program for certain former Travelzoo.com Corporation promotional shareholders remains open-ended. Future cost cannot be reliably estimated and depends on valid claims and the Company’s stock price.
- The Company expects to adopt the new revenue recognition standard on January 1, 2018 using the modified retrospective method. It expects changes principally in the timing of recognition for revenue related to unredeemed Local Deals and Getaway vouchers, but had not determined whether the impact would be material.
- A 400,000-share executive stock option grant was made on October 30, 2017, after quarter-end, with an exercise price of $6.95.
Investor verification checklist
- Verify the ultimate resolution, timing and potential cash impact of the approximately $31.0 million IRS tax proposal.
- Assess whether revenue declines and lower revenue per member continue, particularly in Asia Pacific and Europe.
- Review the effect of the 2018 revenue recognition adoption on reported revenue, retained earnings and voucher liabilities.
- Monitor operating cash flow, cash held overseas and the sustainability of share repurchases.
- Evaluate the hotel booking platform’s revenue contribution, development costs and competitive positioning.
- Review exposure to voucher refunds, unredeemed-voucher regulation, merchant performance and the remaining promotional-share claims program.
- Consider controlling-stockholder risk: Azzurro Capital, associated with founder Ralph Bartel, owned approximately 57.8% of outstanding shares at September 30, 2017.