Travelzoo Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2014. Travelzoo is a global Internet media company generating primarily advertising revenue from travel, search, local deals and related products. Reportable segments are North America and Europe; Asia Pacific operations are operated by related entities under license and are not owned by Travelzoo.
Key Financial Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $33.5 million | $37.3 million | $110.6 million | $120.8 million |
| Gross profit | $29.0 million | $32.9 million | $97.0 million | $108.0 million |
| Gross margin | 86.6% | 88.4% | 87.7% | 89.5% |
| Income from operations | $2.7 million | $(18.0) million | $19.8 million | $(2.2) million |
| Operating margin | 8.0% | (48.4)% | 17.9% | (1.8)% |
| Net income | $2.5 million | $(19.0) million | $15.1 million | $(8.2) million |
| Diluted EPS | $0.17 | $(1.24) | $1.01 | $(0.54) |
| Net cash provided by operations | Not separately provided | Not separately provided | $1.7 million | $18.7 million |
Cash and cash equivalents were $57.2 million at September 30, 2014, compared with $66.2 million at December 31, 2013. Approximately $40.7 million was held outside the United States. Restricted cash was $1.4 million. The company reported no outstanding debt and no derivative transactions.
Total assets were $94.6 million and stockholders’ equity was $39.9 million at September 30, 2014. The company stated that cash on hand should be sufficient for working-capital needs for at least the next twelve months, although additional funding could be required for unexpected events, investments or unfavorable business developments.
Material Changes Versus Prior Period
- Third-quarter revenue declined 10.1% year over year; nine-month revenue declined 8.4%.
- North America revenue declined $3.6 million in the quarter and $12.2 million for the first nine months, primarily from lower Local and Search revenue.
- Europe revenue decreased modestly in the quarter but increased $2.1 million for the first nine months, led by Travel revenue growth.
- Search revenue declined from $6.0 million to $4.4 million in the quarter and from $19.4 million to $13.6 million for the first nine months, reflecting lower monetized clicks and reduced traffic acquisition spending.
- Local revenue declined from $8.0 million to $6.4 million in the quarter and from $26.7 million to $21.3 million for the first nine months, primarily because fewer Local Deals vouchers were sold.
- Sales and marketing expense decreased $0.9 million in the quarter and $6.9 million for the first nine months, while general and administrative expense increased $0.5 million and $1.5 million, respectively.
- Results benefited materially from the reversal of reserves for unexchanged promotional shares: $2.3 million in the quarter and $5.8 million for the first nine months. The comparable 2013 periods included a $22.0 million charge.
- Subscribers increased to 24.2 million from 23.2 million, but consolidated revenue per subscriber decreased to $5.74 from $6.64 and average acquisition cost increased to $3.66 from $1.91.
Cash Flow, Capital Allocation and Liquidity
- For the first nine months, operating cash flow was $1.7 million, investing cash flow was $(2.7) million and financing cash flow was $(6.3) million.
- Capital expenditures were $2.9 million.
- The company repurchased 260,500 shares for approximately $5.9 million and incurred $0.5 million related to the reverse/forward stock split.
- Cash decreased $9.0 million during the first nine months, including a $1.7 million adverse foreign-exchange effect.
- Operating leases totaled $30.5 million of future minimum payments; total contractual commitments, including purchase obligations, were $32.4 million.
Outlook, Commentary and Risks
Management did not provide formal revenue or earnings guidance. It expects continued investment in subscriber acquisition, mobile and social-media capabilities, product development and the hotel booking platform. Management indicated that Search revenue could decline by up to $2.0 million in the fourth quarter of 2014 versus the prior-year quarter because of planned reductions in traffic acquisition spending.
- Search products, including SuperSearch and Fly.com, are under performance review and could be merged, discontinued or replaced. Management cited search-engine traffic challenges and poor mobile monetization.
- Competition, changes in search-engine algorithms, mobile adoption, declining Local voucher demand and pressure on take rates may reduce revenue and margins.
- The IRS issued a Revenue Agent’s Report proposing approximately $31 million of additional federal and state tax expense, excluding interest and potential state penalties, related primarily to the 2009 Asia Pacific sale. Travelzoo disputes the proposed adjustment and intends to contest it.
- Unrecognized tax benefits, including accrued interest and penalties, totaled approximately $10.8 million. The company cannot estimate the range or timing of potential adjustments.
- Remaining state unclaimed-property claims related to unexchanged promotional shares involve approximately 400,000 potentially affected shares. The company has reserves but states that total exposure depends on the application of state laws, penalties and interest.
- Travelzoo is defending a patent-infringement lawsuit concerning Fly.com. Potential damages cannot currently be estimated.
- Azzurro Capital, controlled by the founder’s family trust, held approximately 49.1% of outstanding shares and had voting power of approximately 50.4% through a proxy, creating significant controlling-stockholder risk.
Investor Verification Items
- Verify the ultimate outcome and potential cash impact of the IRS tax proposal, including interest and penalties.
- Monitor remaining unclaimed-property claims, reserve adequacy and future settlement payments.
- Assess whether Search and Local revenue declines stabilize and whether the hotel booking platform and mobile initiatives generate sufficient returns.
- Evaluate declining revenue per subscriber and higher subscriber-acquisition costs despite subscriber growth.
- Review foreign-currency exposure, including the reported $1.7 million translation impact on cash and the sensitivity to a hypothetical 10% adverse currency movement.
- Consider the controlling voting position of Azzurro Capital and related-party revenue-sharing and hosting arrangements.