Travelzoo Inc. Form 10-Q Summary
Business Context and Reporting Period
Travelzoo is a global Internet media company providing travel, search, local deals, Getaways, newsletters, websites and related advertising services. Revenue is generated primarily from advertising fees and commissions on voucher sales. The report covers the three months ended March 31, 2012, compared with the same period in 2011. Reportable segments are North America and Europe; Asia Pacific operates under a license arrangement following its 2009 sale.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $39.3 million | $37.0 million |
| Gross profit | $35.3 million | $34.5 million |
| Gross margin | 89.7% | 93.4% |
| Operating income (loss) | $6.6 million | $(10.0) million |
| Operating margin | 16.7% | (27.0)% |
| Net income (loss) | $3.7 million | $(14.0) million |
| Diluted earnings (loss) per share | $0.23 | $(0.85) |
| Net cash from operating activities | $9.8 million | $10.7 million |
| Capital expenditures | $0.7 million | $0.7 million |
At March 31, 2012, cash and cash equivalents were $48.6 million, restricted cash was $3.1 million, and total assets were $79.1 million. The company reported no outstanding debt and no derivatives. Current liabilities were $36.8 million, including $18.6 million of Local Deals and Getaways merchant payables. Management stated that cash on hand should fund working-capital needs for at least the next 12 months. Cash increased $9.8 million during the quarter, including a $0.7 million favorable foreign-exchange effect.
Material Changes Versus the Prior Comparable Period
- Revenue increased 6.4% to $39.3 million. North America revenue rose $1.0 million, while Europe revenue rose $1.3 million.
- Consolidated revenue growth was driven primarily by Local revenue, which increased to $9.1 million from $6.6 million, and Search revenue, which increased to $7.3 million from $6.9 million. Travel revenue declined to $22.9 million from $23.5 million.
- Cost of revenue increased $1.6 million to $4.1 million, reducing gross margin by 3.7 percentage points. Drivers included higher voucher-related subscriber refunds, credit-card fees, customer-service costs and third-party network payments.
- Sales and marketing expense was broadly stable at $16.3 million, as lower subscriber-acquisition costs offset higher employee and Search traffic-acquisition costs. General and administrative expense increased $1.0 million to $9.4 million.
- The prior-year period included a $20.0 million Delaware settlement charge related to unexchanged merger shares. Q1 2012 included a separate $3.0 million charge for related unclaimed-property reviews by other states. These unusual items substantially affected the year-over-year profit comparison.
- North America operating income declined to $7.1 million from $9.3 million, with operating margin falling to 24.9% from 33.5%. Europe operating income increased to $2.4 million from $0.7 million, and its operating margin rose to 22.5% from 7.8%.
- Subscribers increased to 21.8 million from 19.9 million, but consolidated homepage page views declined to 12.8 million from 16.8 million. Revenue per subscriber declined to $7.33 from $7.80.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management expects continued investment in subscriber growth, product development, international expansion, sales and marketing, and employee headcount. Management also expects fluctuations in cost of revenue, marketing expense, general and administrative expense and effective tax rates.
- The unexchanged merger-share contingency remains unresolved. The company recorded a $3.0 million charge, but stated that additional claims, if fully upheld, could cost approximately $20.0 million beyond the amount accrued. The ultimate amount and outcome are not estimable.
- Several securities class actions and shareholder derivative lawsuits remain pending. The company believes the claims are without merit, intends to defend them vigorously, and cannot estimate potential losses.
- Future operating-lease and purchase commitments totaled $13.3 million as of March 31, 2012, including $12.4 million of operating-lease payments.
- Tax risk includes approximately $1.9 million of unrecognized tax benefits, ongoing federal, state and foreign examinations, and an effective tax rate of 44% for Q1 2012.
- Key business risks include intense competition, dependence on advertisers and email distribution, volatility in voucher refunds and merchant performance, economic weakness in Europe, foreign-currency exposure, technology and service disruptions, regulatory treatment of vouchers, and difficulty retaining subscribers and key personnel.
- A hypothetical 10% adverse foreign-currency movement would have produced an estimated $101,000 incremental foreign-exchange loss for the quarter. The company does not hedge this exposure.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2012, with no material change in internal control over financial reporting during the quarter.
Facts Investors Should Verify
- Whether Local Deals and Getaways growth can offset declining Travel revenue and sustain margins as voucher-related costs and refunds increase.
- The ultimate liability and cash impact from unexchanged merger-share claims and related state unclaimed-property reviews.
- The status and potential financial exposure of the securities and derivative litigation.
- Whether subscriber growth translates into higher engagement, page views and revenue per subscriber.
- The adequacy of voucher refund reserves and merchant-payable balances.
- The sustainability of Europe’s improved profitability amid economic, currency and competitive pressures.
- The effect of ongoing tax examinations and the company’s unrecognized tax benefits on future cash taxes and earnings.