Travelzoo Inc. — Form 10-Q Summary
Business Context and Reporting Period
Travelzoo is a global Internet media company that generates primarily advertising revenue from travel, search, local deals and Getaways products. The company reports North America and Europe as operating segments; its Asia Pacific brand and technology are operated by related-party licensees. This report covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. The financial statements are unaudited.
Financial Performance and Liquidity
| Metric | Three Months Ended June 30, 2013 | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|---|---|
| Revenue | $41.3 million | $39.4 million | $83.5 million | $78.7 million |
| Gross profit | $36.9 million | $35.7 million | $75.1 million | $71.0 million |
| Gross margin | 89.3% | 90.8% | 89.9% | 90.2% |
| Income from operations | $7.8 million | $10.4 million | $15.8 million | $16.9 million |
| Operating margin | 18.8% | 26.4% | 18.9% | 21.5% |
| Net income | $5.2 million | $7.3 million | $10.8 million | $11.0 million |
| Diluted EPS | $0.34 | $0.45 | $0.70 | $0.69 |
- Revenue increased 5.0% in the second quarter and 6.1% year to date. Travel revenue grew to $24.6 million in the quarter and $51.4 million year to date, while Search and Local revenue declined.
- Sales and marketing expense increased 21.1% in the quarter and 21.0% year to date, primarily from higher employee-related costs and increased headcount. General and administrative expense increased 3.7% in the quarter and 7.5% year to date.
- Operating margin declined principally because expense growth exceeded revenue growth. The 2012 year-to-date period also included a $3.0 million charge for unexchanged promotional merger shares, which was absent in 2013.
- Net cash provided by operating activities was $16.5 million for the six months, compared with $16.8 million in 2012. Capital expenditures were $2.1 million, and investing cash outflows totaled $2.4 million.
- Cash and cash equivalents were $73.4 million at June 30, 2013, up from $61.2 million at December 31, 2012. Approximately $26.0 million was held outside the United States. Restricted cash was $3.5 million.
- The company reported no outstanding debt and no derivative transactions. Management stated that cash on hand should meet working-capital needs for at least the next 12 months.
- Current liabilities were $45.3 million, including $22.4 million of Local Deals and Getaways merchant payables. Total stockholders’ equity was $53.4 million.
Material Changes Versus the Prior Comparable Period
- North America revenue increased 5.4% in the quarter and 5.1% year to date, driven mainly by Travel and Getaways, while Local revenue declined.
- Europe revenue increased 4.0% in the quarter and 9.0% year to date, also driven by Travel and Getaways; Search revenue declined.
- Consolidated subscribers increased to 23.0 million from 22.1 million, excluding approximately 3.7 million Asia Pacific subscribers. Average cost per acquired subscriber increased to $1.33 from $1.05.
- Cost of revenue increased to 10.7% of revenue in the quarter from 9.2%, reflecting higher third-party network payments and Local Deals and Getaways costs.
- Foreign currency translation reduced comprehensive income by $1.4 million year to date, compared with a $62,000 reduction in the 2012 period.
- Cash used in investing activities increased because purchases of property and equipment rose to $2.1 million from $1.3 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected Local and Travel revenue to decline sequentially in the quarter ending September 30, 2013 because of seasonality.
- The company expected continued elevated sales and marketing and general and administrative spending to support subscriber growth, mobile and social-media initiatives, international expansion, analytics, product development and a hotel booking platform. Management indicated that hotel-platform development would reduce diluted EPS by approximately $0.05 in the third quarter of 2013.
- Key business risks include intense competition, dependence on advertising demand and subscriber engagement, declining average vouchers sold per deal, mobile migration, economic weakness in Europe, foreign-exchange exposure, technology and service interruptions, payment-processing risks and the ability to retain key personnel.
- Potentially material contingencies include state unclaimed-property reviews involving unexchanged promotional merger shares. If all referenced claims were upheld, the company estimated an additional cost of approximately $27.2 million above accrued amounts, plus possible interest or penalties; the ultimate exposure is not estimable.
- The company recorded $8,000 and $14,000 of expense during the quarter and year to date, respectively, for its cash-payment program for qualifying former Travelzoo.com shareholders.
- A securities class action was dismissed in March 2013, but plaintiffs appealed. Related derivative actions were dismissed without prejudice in May 2013. A patent-infringement lawsuit involving Fly.com remains pending; potential losses cannot be estimated.
- The company had approximately $9.4 million of unrecognized tax benefits and $874,000 of accrued interest and penalties at June 30, 2013. Federal tax returns for 2009 and 2010 were under examination.
- Operating lease and purchase commitments totaled approximately $21.0 million. A hypothetical 10% adverse currency movement was estimated to produce an incremental $88,000 foreign-exchange loss for the six-month period.
- Azzurro Capital, controlled by the Ralph Bartel 2005 Trust, held approximately 47.1% of outstanding shares, giving Ralph Bartel effective control of the company and the ability to influence board elections.
Investor Verification Points
- Verify whether revenue growth can accelerate without further compressing operating and net margins.
- Assess the return on increased headcount, subscriber acquisition spending and mobile, social-media and hotel-platform investments.
- Monitor Local Deals and Getaways voucher volume, refund rates, merchant payables and related liquidity exposure.
- Evaluate the potential cash impact of unclaimed-property claims and the pending Fly.com patent litigation.
- Review the status and potential resolution of federal and other tax examinations and the $9.4 million of unrecognized tax benefits.
- Consider foreign-currency effects, the concentration of voting control and the related-party Asia Pacific licensing and revenue-sharing arrangements.