Travelzoo Inc. — Form 10-Q Summary
Business context and reporting period
Travelzoo is a global media commerce company generating primarily advertising and commission revenue from travel, search, local deals, Getaways, hotel booking and related products. The filing covers the quarter and nine months ended September 30, 2015. Results include the Asia Pacific business retrospectively as a common-control transaction and change in reporting entity, as though acquired at the beginning of each period.
- Reported approximately 28.3 million members at September 30, 2015, compared with 27.7 million a year earlier.
- Azzurro Capital, controlled by founder and director Ralph Bartel, owned approximately 50.4% of outstanding shares.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $33.7 million | $36.3 million | $109.7 million | $118.9 million |
| Gross profit | $29.0 million | $31.5 million | $95.2 million | $104.4 million |
| Gross margin | 85.9% | 86.7% | 86.8% | 87.8% |
| Operating income | $0.9 million | $1.8 million | $6.2 million | $17.6 million |
| Operating margin | 2.6% | 5.1% | 5.6% | 14.8% |
| Net income | $8.9 million | $1.8 million | $10.4 million | $13.1 million |
| Diluted EPS | $0.60 | $0.12 | $0.71 | $0.88 |
- Revenue declined 7.1% in Q3 and 7.8% for the first nine months. Travel revenue declined to $23.6 million in Q3 from $24.7 million; Local revenue declined to $5.6 million from $6.9 million; Search revenue declined to $4.5 million from $4.7 million.
- Sales and marketing expense declined 11.5% in Q3 and 1.4% for the nine months. Product development expense declined 6.1% in Q3 but increased 10.1% year to date. General and administrative expense declined 15.2% in Q3 and 16.3% year to date.
- Net income benefited from an $8.4 million tax benefit related to unexchanged promotional shares after expiration of certain statutes of limitation. The resulting effective tax rate was negative 1,246% in Q3 and negative 96.6% for the nine months.
- Net cash provided by operating activities was $1.1 million for the nine months, compared with cash used of $0.7 million in the prior-year period. Capital expenditures were $0.9 million.
- Cash and cash equivalents were $34.6 million at September 30, 2015, down from $55.4 million at December 31, 2014. Approximately $19.2 million was held outside the United States.
- The company used $17.0 million of cash and issued a $5.7 million promissory note to acquire Asia Pacific. The note bears 7% interest and matures August 20, 2018. Total related-party note payable was $5.7 million at quarter-end.
- Contractual commitments totaled $35.1 million, including $26.1 million of operating leases, $2.2 million of purchase obligations and $6.8 million related to the Asia Pacific note.
Material changes versus the prior comparable period
- North America revenue declined 9.7% in Q3 and 7.3% year to date, primarily from lower Getaways and Local Deals voucher sales and lower paid clicks. North America operating margin improved to 3.3% from 1.2% in Q3 but declined to 7.7% from 11.6% year to date.
- Europe revenue declined 2.6% in Q3 and 10.1% year to date, including negative foreign-currency impacts of approximately $1.2 million and $4.3 million, respectively. Q3 operating margin improved to 5.7% from 1.8%, while the nine-month margin declined to 7.4% from 15.3%.
- Asia Pacific revenue declined 2.6% in Q3 and 2.6% year to date. Its operating loss improved to $0.4 million in Q3 from $0.9 million and to $1.5 million year to date from $2.3 million.
- Operating income fell 53.4% in Q3 and 65.0% year to date, reflecting lower revenue and the absence of prior-year releases of $2.3 million in Q3 and $5.8 million year to date related to unexchanged promotional-share reserves.
- Cash declined primarily because of the Asia Pacific acquisition, financing activities and a $2.7 million unfavorable foreign-exchange effect.
Outlook, management commentary, risks and unusual items
- No specific revenue or earnings guidance was provided. Management stated that cash on hand was expected to fund working-capital and capital-expenditure needs for at least the next twelve months.
- Management expects continued investment in mobile applications, social media, hotel booking capabilities and search functionality. Search revenue may continue to decline while SuperSearch and Fly.com are reviewed, potentially including consolidation, discontinuation or replacement.
- Key operating pressures include declining Local Deals and Getaways voucher demand, competition, mobile monetization, search-engine algorithm and traffic-acquisition changes, advertiser retention and foreign-currency volatility.
- The IRS proposed approximately $31.0 million of additional federal tax, penalties and state tax expense, excluding interest and possible state penalties, relating primarily to the 2009 sale of the Asia Pacific business. Travelzoo disagrees and intends to contest the proposal; no related liability was recorded for the quarter.
- The company had approximately $2.2 million of unrecognized tax benefits and approximately $0.9 million of accrued interest and penalties related to uncertain tax positions at September 30, 2015. Management stated that the range of possible adjustments could not be estimated.
- The patent infringement action brought by Metasearch Systems was dismissed during the quarter after the asserted patents were determined unpatentable in post-grant review.
- The voluntary cash program for certain former promotional shareholders remains outstanding. Future cost cannot be reliably estimated and depends on valid claims and the company’s stock price.
- The company reported effective disclosure controls as of September 30, 2015. Internal-control changes were made for the Asia Pacific reporting-entity change and an updated accounting system; operating effectiveness of the latter was to be evaluated in the annual assessment.
Important facts for investors to verify
- Whether revenue declines in Local, Travel and Search stabilize, particularly in North America and Europe.
- The sustainability of profitability excluding the $8.4 million one-time tax benefit and the effect of future tax-rate fluctuations.
- The ultimate outcome and cash exposure from the IRS proposal of approximately $31.0 million plus interest and penalties.
- Asia Pacific’s path to profitability and the economics of its related-party acquisition and $5.7 million promissory note.
- Cash availability after acquisition-related spending, foreign cash restrictions, contractual commitments and potential tax or promotional-share payments.
- Progress and required investment in the mobile, hotel-booking and search products, including whether these initiatives improve monetization.
- Impact of competition, foreign exchange, voucher refunds, unredeemed vouchers and potential regulatory or tax obligations affecting online travel and voucher transactions.