Travelzoo Inc. — FY2013 Form 10-K Summary
Business context and reporting period
Travelzoo is a global Internet media company providing travel, entertainment, local-deal, search and voucher advertising services. The filing covers the fiscal year ended December 31, 2013, including fourth-quarter results. Operations comprise North America and Europe; Asia Pacific is operated by related licensees and is not owned by the Company. Europe represented 29% of 2013 revenue, while North America represented 71%.
Key financial metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $158.2 million | $151.2 million | +4.7% |
| Gross profit | $140.8 million | $135.4 million | +4.0% |
| Gross margin | 89.0% | 89.6% | Down 0.6 points |
| Operating income | $2.3 million | $25.5 million | Down $23.2 million |
| Operating margin | 1.4% | 16.9% | Down 15.5 points |
| Net income (loss) | $(5.0) million | $18.2 million | Decline of $23.2 million |
| Diluted EPS | $(0.33) | $1.14 | Declined |
| Cash flow from operations | $16.9 million | $36.7 million | Down $19.8 million |
| Cash and cash equivalents | $66.2 million | $61.2 million | Up $5.1 million |
Fourth-quarter 2013 revenue was $37.5 million versus $37.0 million in the prior-year quarter. Fourth-quarter operating income was $4.5 million and net income was $3.2 million, compared with $4.4 million and $3.8 million, respectively, in fourth-quarter 2012.
Travel revenue increased to $98.4 million from $86.5 million, while Search revenue declined to $24.0 million from $27.3 million and Local revenue declined to $35.8 million from $37.4 million. Cost of revenues increased to $17.4 million, or 11.0% of revenue, from $15.7 million, or 10.4%.
Sales and marketing expense increased to $74.9 million from $68.2 million, and general and administrative expense increased to $41.7 million from $38.7 million. The Company had no outstanding debt and reported working capital of $30.9 million versus $42.7 million in 2012. Total assets were $114.8 million and stockholders’ equity was $31.3 million at year-end.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher Travel revenue, including Getaway vouchers and increased email delivery. Search revenue declined because of fewer monetized clicks and reduced traffic acquisition, while Local revenue declined because of fewer vouchers sold and lower merchant take rates.
- Operating performance was materially reduced by a $22.0 million charge for settlements and potential future settlements related to unexchanged promotional shares. The charge was recorded in the third quarter and was not deductible for tax purposes.
- Income tax expense was $7.7 million, producing an unusually high 285% effective tax rate, principally because the promotional-share charge generated no tax benefit.
- North America operating income declined to $16.6 million from $21.5 million, while Europe operating income increased to $7.7 million from $7.0 million. North America and Europe operating margins were approximately 15% and 17%, respectively, excluding the corporate promotional-share charge.
- Cash flow from operations declined principally because 2012 benefited from stronger net income. 2013 operating cash flow included a $9.7 million increase in the promotional-share reserve.
- The Company repurchased 371,000 shares for $7.8 million during 2013. A reverse/forward stock split resulted in approximately 643,000 fractionalized shares and a $13.7 million payable to affected shareholders at year-end.
Outlook, management commentary, risks and unusual items
Management expects cash on hand to fund working capital needs for at least the next 12 months. No formal revenue or earnings guidance is provided. The Company expects continued investment in sales, marketing, product development, mobile offerings, social-media reach and a hotel-booking platform; development costs for that platform were expected to exceed $1.1 million during the first quarter of 2014.
- Search revenue may continue to decline as the Company reviews whether to merge, discontinue or replace SuperSearch and Fly.com.
- Local Deals and Getaway face competitive pressure, declining average vouchers sold per deal and lower take rates. Refund rates, merchant performance and voucher-related legal requirements could affect liquidity and profitability.
- The Company recorded a $22.0 million promotional-share contingency charge and retained a $12.7 million reserve at year-end. Remaining state claims could involve approximately 400,000 additional shares; the ultimate exposure, including possible penalties and interest, is not fully determinable.
- Unrecognized tax benefits were approximately $9.3 million, with approximately $1.0 million of accrued interest and $80,000 of accrued penalties. Federal tax returns for 2009 and 2010 were under examination.
- The Company faces a patent-infringement lawsuit involving Fly.com seeking unspecified damages; potential loss cannot be estimated. A shareholder derivative action concerning the Asia Pacific sale was dismissed with prejudice in January 2014, subject to a possible appeal.
- Key business risks include intense competition, dependence on online advertising and email distribution, mobile-platform migration, search-engine traffic changes, advertiser concentration within the broader industry, foreign currency exposure, privacy and Internet regulation, and technology or service interruptions.
Contractual commitments at December 31, 2013 totaled $34.9 million, including $33.2 million of operating leases and $1.7 million of purchase obligations. The Company reported effective disclosure controls and effective internal control over financial reporting, with a clean KPMG audit opinion.
Important facts for investors to verify
- Reconcile reported net loss and operating cash flow after isolating the $22.0 million promotional-share charge and related reserve movements.
- Review the remaining state unclaimed-property claims, reserve adequacy and cash payments beyond the $12.3 million paid in 2013.
- Assess whether Travel revenue growth can offset continuing Search and Local declines and whether the hotel-booking platform can generate returns above its development costs.
- Verify the sustainability of the $66.2 million cash balance, including $48.4 million held outside the United States and $13.7 million payable for the reverse/forward split.
- Monitor tax audits, approximately $9.3 million of unrecognized tax benefits, and the potential effect of future tax settlements on cash and earnings.
- Consider governance and related-party risks: Azzurro Capital, controlled by the founder’s trust, held approximately 48.2% of outstanding shares and operates the licensed Asia Pacific business.