Travelzoo Inc. Form 10-Q Summary
Business context and reporting period
Travelzoo is a global Internet media company providing travel, search, local-deal and entertainment advertising services through websites, email products, Fly.com and voucher offerings. The filing covers the quarter and six months ended June 30, 2012. Reported operating segments are North America and Europe; Asia Pacific operations are operated by related entities under license agreements.
Key financial metrics
| Metric | Three months ended June 30, 2012 | Comparable period | Six months ended June 30, 2012 |
|---|---|---|---|
| Revenue | $39.4 million | $37.0 million | $78.7 million |
| Gross profit | $35.7 million | $34.5 million | $35.3 million as presented in the financial statements; MD&A presents six-month revenue of $78.7 million |
| Gross margin | 90.8% | 92.2% | 90.2% |
| Operating income | $10.4 million | Operating loss of $10.0 million in the primary statement; segment discussion presents $7.6 million before certain presentation differences | $6.6 million in the primary statement; MD&A segment presentation shows $16.9 million before the $3.0 million merger-share charge |
| Net income (loss) | $7.3 million | $4.9 million | $11.0 million |
| Diluted EPS | $0.45 | $0.30 | $0.69 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided | $16.8 million |
| Cash and cash equivalents | $54.2 million at June 30, 2012 | $38.7 million at December 31, 2011 | |
| Debt | No outstanding debt | No derivatives |
The filing’s primary statements contain apparent extraction or presentation inconsistencies, particularly for six-month revenue, operating income and pretax income. Investors should reconcile these amounts to the filed XBRL data and audited annual financial statements.
Material changes versus the prior comparable period
- Second-quarter revenue increased approximately 6.5% to $39.4 million, driven primarily by Local revenue and higher Getaways activity.
- Six-month revenue increased approximately 5.6% to $78.7 million. Consolidated Local revenue increased to $19.3 million from $15.3 million, while Search revenue declined to $14.3 million from $14.6 million.
- Second-quarter gross margin declined to 90.8% from 92.2%, primarily because of higher Local Deals and Getaways costs, including credit-card fees and third-party network payments.
- Second-quarter sales and marketing expense declined to $16.1 million from $18.7 million, mainly because of lower television and subscriber-acquisition spending. General and administrative expense increased to $9.3 million from $8.3 million.
- Europe revenue increased approximately 6.7% in the quarter and 10.1% for the six months. Europe operating margin improved to 23.8% in the quarter from 10.8% and to 23.1% for the six months from 9.4%.
- Subscribers increased to 22.1 million from 20.7 million, excluding approximately 3.4 million Asia Pacific subscribers. Homepage page views declined to 11.4 million from 15.4 million.
- Cash increased by $15.4 million during the first six months, principally from operating cash flow. The prior-year period had operating cash outflow of $0.6 million, largely reflecting the $20.0 million Delaware settlement.
Guidance, outlook, risks and unusual items
- Management expected cash on hand to fund working-capital and capital-expenditure needs for at least the next 12 months.
- In July 2012, management announced expected incremental marketing spending of $3 million to $4 million per quarter for the next six quarters to support subscriber and revenue growth. The filing states that the resulting growth is not assured.
- The company recorded a $3.0 million charge in the first quarter related to unexchanged merger-share claims arising from unclaimed-property reviews by multiple states. If all preliminary claims were upheld, the filing estimated an additional cost of approximately $22.2 million above the accrued amount, plus possible interest and penalties; another MD&A passage states approximately $19.7 million, creating a disclosure inconsistency.
- Two securities class actions and multiple shareholder derivative actions remain pending. The company considers the claims without merit but cannot estimate potential losses.
- Local Deals and Getaways create exposure to voucher refunds, merchant performance, payment-processing costs, gift-card and abandoned-property laws, and potential liabilities for unredeemed vouchers.
- Other risks include intense competition, dependence on online advertising and email delivery, economic weakness in Europe, foreign-currency volatility, technology outages, subscriber-acquisition economics and reliance on key personnel.
- The company held $25.7 million of cash outside the United States, which could create additional U.S. tax consequences if repatriated. A hypothetical 10% adverse currency movement was estimated to produce a $101,000 incremental foreign-exchange loss for the six-month period.
- The board authorized repurchases of up to 1.0 million shares in July 2012. No repurchases were reported in the six months ended June 30.
Facts investors should verify
- Reconcile the apparent inconsistencies between the primary financial statements, segment note and MD&A, especially six-month revenue, operating income and pretax income.
- Assess the ultimate exposure from unexchanged merger-share claims, including whether the accrued $3.0 million is adequate.
- Evaluate whether the planned $3 million to $4 million quarterly marketing increase can generate sufficient subscriber and revenue growth.
- Review voucher refund reserves, merchant-payable balances of $18.6 million, and potential gift-card or abandoned-property obligations.
- Monitor pending securities and derivative litigation and the company’s approximately $1.6 million of unrecognized tax benefits.
- Consider subscriber quality and engagement, given that subscriber counts rose while homepage page views declined and the filing cautions that subscriber totals may include inactive or duplicate users.