Travelzoo Inc. 2015 Form 10-K Summary
Business Context and Reporting Period
Travelzoo is a global media commerce company generating primarily advertising revenue from travel, entertainment, and local businesses. Its products include email newsletters, websites, mobile applications, Travelzoo Network, SuperSearch, Fly.com, Local Deals, Getaway vouchers, and a developing hotel-booking platform. The filing covers the fiscal year ended December 31, 2015; fourth-quarter data is included where relevant.
Travelzoo reported three geographic segments: North America, Europe, and Asia Pacific. On August 20, 2015, the company acquired the Asia Pacific business from related party Azzurro Capital Inc. for $22.6 million, funded with $17.0 million of cash and a $5.7 million related-party promissory note. Results were retrospectively adjusted for the common-control transaction. Azzurro, controlled by founder and director Ralph Bartel, owned approximately 51.2% of Travelzoo at year-end.
Key Financial Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $141.7 million | $153.2 million | Down 7.5% |
| Gross profit | $122.9 million | $134.1 million | Down 8.3% |
| Gross margin | 86.7% | 87.5% | Down 0.8 percentage points |
| Income from operations | $7.1 million | $17.8 million | Down 59.9% |
| Operating margin | 5.0% | 11.6% | Down 6.6 percentage points |
| Net income | $10.9 million | $13.1 million | Down 16.8% |
| Diluted earnings per share | $0.74 | $0.88 | Down 15.9% |
| Net cash provided by operating activities | $4.2 million | $(1.6) million | Improved $5.8 million |
| Cash and cash equivalents | $35.1 million | $55.4 million | Down $20.3 million |
Cost of revenues was $18.8 million, or 13.3% of revenue, compared with $19.2 million, or 12.5%, in 2014. Sales and marketing expense was $79.0 million, product development expense was $12.5 million, and general and administrative expense was $24.2 million. The company recognized a $5.0 million income tax benefit, producing an unusual negative effective tax rate of 84%, primarily because of an $8.4 million tax benefit related to the expiration of limitations associated with unexchanged promotional shares.
Revenue by category was $99.0 million from Travel, $17.9 million from Search, and $24.8 million from Local. North America generated $88.9 million of revenue, Europe $42.1 million, and Asia Pacific $10.7 million. Asia Pacific remained loss-making, with a 2015 operating loss of $2.4 million.
At December 31, 2015, total assets were $68.6 million, working capital was $16.0 million, and stockholders’ equity was $21.4 million. Current liabilities included $41.0 million of current liabilities, including $23.7 million of accounts payable and a $5.7 million related-party note payable. The related-party loan was fully repaid in January 2016.
Fourth-Quarter 2015
| Metric | Q4 2015 | Q4 2014 |
|---|---|---|
| Revenue | $32.1 million | $34.3 million |
| Income from operations | $1.0 million | $0.2 million |
| Net income | $0.4 million | $(0.1) million |
| Diluted earnings per share | $0.03 | $(0.01) |
Material Changes Versus the Prior Comparable Period
- Total revenue declined 7.5%, driven primarily by lower Local and Travel revenue. Local revenue decreased to $24.8 million from $30.0 million, while Search revenue decreased to $17.9 million from $19.0 million.
- North America revenue declined 8%, and Europe revenue declined 8%; Asia Pacific revenue declined 4% after giving effect to retrospective presentation.
- Lower sales and marketing and general and administrative expenses partly offset the revenue decline, but product development expense increased by $1.2 million due substantially to hotel-platform and technology investments.
- Operating margin fell to 5.0% from 11.6%, despite the absence of the $7.6 million promotional-share reserve release recorded in 2014.
- Member count increased to 28.4 million from 27.7 million, but revenue per member declined to $5.12 from $5.71. Mobile application downloads increased to 4.7 million from 3.9 million.
- Cash declined primarily because of the Asia Pacific transaction, stock repurchases, and $3.3 million of repayment of related-party borrowings, as well as $3.3 million of unfavorable foreign-exchange effects.
- The company repurchased 212,000 shares for $1.7 million during 2015. No dividends were paid or declared.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide quantitative revenue or earnings guidance. The company expects continued investment in member acquisition, mobile products, social-media distribution, international operations, and its hotel-booking platform. Management expects Search revenue to decline because of traffic-acquisition challenges and weak mobile monetization. Local revenue may also continue to decline because of competition and reduced consumer demand for vouchers.
- Tax contingency: An IRS Revenue Agent’s Report proposes approximately $31 million of additional federal tax, federal penalties, and state tax expense, excluding interest and possible state penalties, related to the 2009 sale of the Asia Pacific business. Travelzoo disputes the proposed adjustment and plans to contest it.
- Liquidity: Management expects cash on hand to fund working-capital requirements for at least twelve months. However, $22.6 million of cash was held outside the United States and could face additional taxes if repatriated. Contractual commitments totaled $28.1 million, including $25.3 million of operating leases.
- Business model: Revenue depends on advertising demand, advertiser retention, audience growth, email deliverability, search-engine traffic, and the effectiveness of voucher and hotel-booking products.
- Competitive and technology risks: Google, Amazon, Expedia, Priceline, TripAdvisor, Groupon, online travel agencies, search engines, and other digital platforms may pressure traffic, pricing, margins, and market share.
- Foreign exchange: Currency movements reduced reported revenue, particularly in Europe. A hypothetical 10% adverse currency movement would have produced an estimated additional $149,000 foreign-exchange loss for 2015.
- Related-party governance: The Asia Pacific acquisition and related-party financing involved Azzurro, the company’s controlling stockholder. An independent special committee and independent advisers approved the transaction.
- Controls: Management and KPMG concluded that internal controls were effective, although the assessment excluded Asia Pacific under the permitted first-year exemption for acquired businesses.
Important Facts for Investors to Verify
- Reconcile the $31 million IRS tax exposure, related interest and penalties, and the company’s litigation and administrative strategy.
- Assess whether declining Travel, Search, and Local revenue can stabilize despite increased mobile usage and competition.
- Evaluate Asia Pacific’s ability to improve from a $2.4 million operating loss and whether the acquisition generates adequate returns on the $22.6 million transaction value.
- Review cash availability by jurisdiction, repatriation taxes, contractual commitments, and the effect of the January 2016 related-party debt repayment.
- Examine the sustainability of 2015 net income, given the $8.4 million tax benefit and other unusual tax effects.
- Monitor voucher refund reserves, unredeemed-voucher liabilities, gift-card and unclaimed-property regulations, and hotel-booking tax exposure.
- Consider controlling-stockholder influence, related-party transactions, executive turnover, stock repurchases, and the absence of a dividend.