Travelzoo Inc. Form 10-Q Summary
Business Context and Reporting Period
Travelzoo is a global Internet media company offering travel, search, local deals, newsletters, websites, mobile products and hotel-booking services. Revenue is generated primarily from advertising and transaction-related fees. The filing covers the three months ended March 31, 2015, with comparisons to the three months ended March 31, 2014. Operations are reported in North America and Europe; the Asia Pacific business is operated by related parties under license and is not owned by Travelzoo.
Financial Performance and Position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $36.5 million | $40.2 million | Down 9.2% |
| Gross profit | $32.3 million | $35.4 million | Down 8.9% |
| Gross margin | 88.4% | 88.1% | Up 0.3 percentage points |
| Operating income | $3.8 million | $7.0 million | Down 45.7% |
| Operating margin | 10.4% | 17.4% | Down 7.0 percentage points |
| Net income | $1.9 million | $4.6 million | Down 58.8% |
| Diluted EPS | $0.13 | $0.31 | Down $0.18 |
| Cash flow from operations | $2.4 million | $1.8 million | Up $0.7 million |
Cost of revenues was $4.2 million, or 11.6% of revenue, compared with $4.8 million, or 11.9%, in the prior-year quarter. Sales and marketing expense was $18.0 million, or 49.3% of revenue, compared with $17.8 million, or 44.4%. General and administrative expense was $10.5 million, or 28.7% of revenue, compared with $10.6 million, or 26.3%.
Cash and cash equivalents were $54.0 million at March 31, 2015, including $37.8 million held outside the United States. Total assets were $89.6 million and stockholders’ equity was $39.6 million. The company reported no outstanding debt and no derivative transactions. Management stated that existing cash is expected to fund working capital needs for at least the next twelve months.
Material Changes Versus the Prior Comparable Period
- Revenue declined $3.7 million, primarily from lower Travel and Local revenue and unfavorable foreign currency movements affecting Europe by approximately $1.6 million.
- Travel revenue declined to $25.7 million from $28.4 million, largely due to fewer Getaways vouchers sold and lower paid clicks.
- Local revenue declined to $5.6 million from $6.9 million, primarily due to fewer Local Deals vouchers sold.
- Search revenue increased modestly to $5.1 million from $4.8 million, driven by higher monetizable clicks in North America, partly offset by Europe.
- Sales and marketing expense increased slightly despite lower revenue. Member acquisition and marketing costs increased by $1.9 million, while Search traffic acquisition costs decreased by $665,000.
- Net income was reduced by a higher effective tax rate of 48.6%, compared with 34.9%, including $565,000 of expense for unrecognized state tax benefits.
- Operating cash flow improved despite lower earnings, while cash declined $0.8 million during the quarter primarily because of a $3.1 million foreign exchange impact.
- Members increased to 24.6 million from 23.6 million, but consolidated revenue per member declined to $6.03 from $7.16 and average acquisition cost increased to $2.94 from $1.89.
Guidance, Outlook, Risks and Unusual Items
The company did not provide specific numerical revenue or earnings guidance. Management expects continued investment in member acquisition, mobile and social-media capabilities, product development and the hotel-booking platform. Search revenue may continue to decline while Travelzoo evaluates whether to merge, replace or discontinue Search products. Local revenue and voucher take rates may remain under pressure from competition and weaker consumer demand.
- The IRS proposed additional federal and state tax expense of approximately $31.0 million, excluding interest and penalties, related to the 2009 sale of the Asia Pacific business. Travelzoo disagrees with the proposed adjustment and intends to contest it. No additional liability was recorded for this proposal during the quarter.
- Unrecognized tax benefits totaled approximately $10.0 million, with accrued interest and penalties of approximately $1.6 million. The filing states that total tax contingencies, including interest, were approximately $11.5 million.
- Travelzoo paid $1.4 million during the quarter related to previously settled state claims concerning unexchanged promotional shares. A continuing voluntary payment program remains difficult to estimate and generated a $2,000 charge in the quarter.
- Metasearch Systems has asserted patent-infringement claims involving Fly.com. The company believes the claims are without merit; potential damages cannot be estimated.
- Contractual commitments totaled $29.4 million, consisting of $27.9 million of operating leases and $1.5 million of purchase obligations.
- Foreign currency translation produced a $2.3 million comprehensive loss in the quarter. A hypothetical 10% adverse currency movement would have produced an estimated incremental foreign exchange loss of $158,000.
- Azzurro Capital, controlled by the founder’s family interests, owned approximately 49.1% of outstanding shares and held a proxy representing approximately 50.4% of voting power, creating significant controlling-stockholder risk.
Important Facts for Investors to Verify
- Whether declining Travel and Local revenue continues and whether Search stabilization efforts are successful.
- Whether increased member acquisition spending produces sufficient incremental revenue, given the decline in revenue per member.
- The ultimate resolution and potential cash impact of the approximately $31.0 million IRS tax proposal and other uncertain tax positions.
- The financial impact and resolution of the Fly.com patent litigation.
- Foreign exchange exposure, including the concentration of cash held outside the United States.
- Future costs and liabilities associated with promotional-share claims, voucher refunds and unclaimed property matters.
- The profitability and required investment of the hotel-booking platform, mobile products and other new offerings.
- The effects of controlling voting power held by Azzurro Capital and related-party license and revenue-sharing arrangements.