Travelzoo 2017 Q2 Form 10-Q Summary
Business Context and Reporting Period
Travelzoo is a global publisher of travel, entertainment and local offers, generating revenue primarily from advertising fees, voucher transactions and hotel-platform commissions. The filing covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. Travelzoo reported approximately 29.3 million members and operated across Asia Pacific, Europe and North America. Azzurro Capital, controlled by founder Ralph Bartel, held approximately 56.6% of outstanding shares as of June 30, 2017.
During the first quarter of 2017, the Company discontinued SuperSearch and Fly.com to focus on the Travelzoo brand. Related results are presented as discontinued operations.
Financial Performance and Key Metrics
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Revenue | $26.4 million | $29.8 million | $54.8 million | $60.6 million |
| Gross profit | $23.2 million | $26.3 million | $48.4 million | $53.3 million |
| Gross margin | 87.8% | 88.4% | 88.3% | 87.9% |
| Income from continuing operations | $0.6 million | $1.8 million | $1.5 million | $3.6 million |
| Operating margin | 5.2% | 11.6% | 6.3% | 10.3% |
| Net income | $0.7 million | $2.0 million | $3.4 million | $4.1 million |
| Diluted EPS | $0.05 | $0.14 | $0.26 | $0.29 |
Q2 revenue declined approximately 11.4% year over year, while six-month revenue declined approximately 9.5%. Travel revenue was $22.6 million in Q2, down from $24.5 million, and local revenue was $3.8 million, down from $5.3 million. The Company attributed the declines primarily to fewer emails sent, fewer paid clicks and lower Local Deals and Getaways voucher sales.
Sales and marketing expense decreased to $14.2 million in Q2 from $15.5 million, while product development increased to $2.3 million from $2.0 million. Total operating expenses declined only 4.7%, less than the revenue decline, reducing operating leverage. The effective tax rate increased to 55% in Q2 and 57% for the six-month period, compared with 45% and 42%, respectively, primarily because of changes in the geographic mix of income.
- Asia Pacific revenue declined 20.0% for the six months and generated a $2.7 million operating loss.
- Europe revenue declined 15.2% for the six months; operating profit fell to $1.2 million from $3.6 million.
- North America revenue declined 5.0% for the six months, while operating profit was broadly stable at $4.9 million.
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $21.3 million at June 30, 2017, down from $26.8 million at December 31, 2016. Approximately $10.7 million was held outside the United States.
- Operating cash flow was negative $2.0 million for the six months, compared with positive $3.9 million in the prior-year period. The 2017 result was affected by the $2.9 million gain on sale of the Fly.com domain and a $6.1 million reduction in accounts payable.
- Investing cash flow was positive $2.6 million, including $2.9 million of proceeds from the Fly.com domain sale, offset by $0.3 million of capital expenditures.
- Financing cash flow was negative $6.8 million, primarily due to $6.8 million of share repurchases. The Company repurchased 708,992 shares during the first six months and had 291,000 shares remaining under the February 2017 authorization.
- The balance sheet does not present a debt balance at June 30, 2017. The related-party loan shown in the prior-year cash flow statement had been repaid in 2016.
- Management stated that cash on hand is expected to fund working-capital needs for at least the next twelve months, although additional financing could be required for unfavorable developments, expansion or acquisitions.
Material Changes, Outlook and Risks
Management is focusing on the global Travelzoo brand, mobile products and the hotel booking platform. The Company expects continued investment in product development, international operations, audience acquisition and mobile capabilities. It also expects ongoing pressure from competition, declining consumer demand for vouchers, lower voucher take rates, advertiser budget changes and a shift toward commission-based hotel revenue.
The most significant contingency is an IRS Revenue Agent’s Report concerning the 2009 sale of the Asia Pacific business. The IRS proposed additional federal tax, penalties and state tax expense of approximately $31.0 million, excluding interest and possible state penalties. Travelzoo disagrees with the proposed adjustment and intends to contest it. The Company recorded no additional liability for this matter during the quarter and cannot estimate the range or timing of a possible adjustment.
- Unrecognized tax benefits were approximately $1.6 million, with accrued interest and penalties of approximately $1.0 million; total tax-related contingencies including interest were approximately $2.6 million.
- Contractual commitments totaled approximately $25.7 million, including $24.8 million of operating leases and $0.9 million of purchase obligations.
- The voluntary cash program for certain former Travelzoo.com Corporation promotional shareholders remains open-ended; its ultimate cost cannot be reliably estimated. No payments were made during the six months ended June 30, 2017.
- Key operating risks include continued revenue declines, unprofitable Asia Pacific operations, competition from large online travel and advertising platforms, mobile and search-engine dependence, voucher refunds and merchant performance, foreign exchange volatility, data-security and payment-processing risks, and tax and regulatory exposure.
- The Company expects to adopt the new revenue-recognition standard on January 1, 2018 using a cumulative-effect adjustment, but had not determined whether the impact would be material.
Important Facts for Investors to Verify
- Whether revenue stabilization or growth occurs in Travel, Local Deals, Getaways and the hotel platform.
- Whether Asia Pacific can reduce its operating losses and whether Europe can recover its prior profitability.
- The ultimate resolution and potential cash cost of the IRS tax assessment, including interest and penalties.
- Whether negative operating cash flow persists after excluding the Fly.com sale and working-capital movements.
- The sustainability of cash balances after share repurchases and the effect of foreign-held cash on liquidity and repatriation taxes.
- The impact of the 2018 revenue-recognition adoption and subsequent lease and cash-flow accounting standards.
- Whether voucher refunds, merchant liabilities, unredeemed voucher obligations and the Netsurfer program generate material additional cash requirements.