Travelzoo Inc. Form 10-K Summary
Business context and reporting period
Travelzoo is a global Internet media company providing travel, entertainment, local-deal, voucher, email, website, search and mobile products. Revenue is generated primarily from advertising fees and transaction-related fees. The filing covers the fiscal year ended December 31, 2012; fourth-quarter information is presented as unaudited supplementary data.
The company operates through North America and Europe. North America represented 72% of 2012 revenue and Europe 28%. Asia Pacific operations were sold in 2009 and are accounted for as discontinued operations, although the buyer operates related websites under a license agreement.
Key financial metrics
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $151.2 million | $148.3 million | +1.9% |
| Gross profit | $135.4 million | $135.1 million | +0.3% |
| Gross margin | 89.6% | 91.0% | Down 1.4 points |
| Income from operations | $25.5 million | $15.0 million | +69.7% |
| Operating margin | 16.9% | 10.1% | Up 6.8 points |
| Net income | $18.2 million | $3.3 million | +448% |
| Diluted EPS | $1.14 | $0.20 | +470% |
| Net cash from operations | $36.7 million | $15.6 million | +135% |
Revenue mix in 2012 was $86.5 million from Travel, $27.3 million from Search and $37.4 million from Local. North America revenue was $108.8 million, with operating income of $21.5 million; Europe revenue was $42.4 million, with operating income of $7.0 million.
At December 31, 2012, cash and cash equivalents were $61.2 million, including $25.0 million held outside the United States. Working capital was $42.7 million, total assets were $97.8 million and stockholders’ equity was $43.3 million. The company reported no outstanding debt and no derivative transactions. Management stated that cash on hand was expected to fund working capital needs for at least the next 12 months.
Cash used in investing activities was $3.7 million, primarily for property, equipment, intangible assets and restricted cash. Financing activities used $11.5 million for share repurchases. The company repurchased 600,000 shares for $11.5 million under a 1,000,000-share authorization, leaving 400,000 shares authorized for repurchase at year-end.
Material changes versus comparable periods
- Revenue growth was modest because increases in Local and Getaway voucher revenue were largely offset by lower Search and traditional Travel revenue.
- Local revenue increased to $37.4 million from $34.0 million, while Search revenue declined to $27.3 million from $29.1 million and Travel revenue increased to $86.5 million from $85.2 million.
- North America revenue was essentially flat, while Europe revenue increased 6.5% and Europe operating margin improved to 17% from 12%.
- Cost of revenues increased to $15.7 million from $13.3 million, reducing gross margin. The increase reflected higher third-party network payments, voucher-related credit card fees, customer service costs and refunds.
- Sales and marketing expense rose to $68.2 million from $65.5 million, and general and administrative expense rose to $38.7 million from $34.5 million, principally because of higher headcount and operating costs.
- Reported profitability benefited from a substantially lower charge for unexchanged promotional merger shares: $3.0 million in 2012 versus $20.0 million in 2011. The 2011 charge related to a Delaware settlement and is not indicative of recurring operating performance.
- Consolidated subscribers increased to 22.5 million from 21.5 million, but revenue per subscriber declined to $7.04 from $7.85 and revenue per employee declined to $388 from $441.
- Fourth-quarter revenue increased to $37.0 million from $35.2 million, while fourth-quarter net income declined to $3.8 million from $6.4 million and operating income declined to $4.4 million from $8.2 million.
Guidance, outlook, commentary and risks
The filing does not provide specific numerical revenue, earnings or margin guidance. Management expects continued investment in sales, marketing, headcount, mobile products and a hotel booking platform, with expenses likely to fluctuate and potentially grow faster than revenue.
Management identified competitive pressure, limited recent advertising-rate increases, changing consumer behavior toward mobile usage, reduced demand from certain airlines and travel intermediaries, European economic uncertainty, and declining average vouchers sold per deal as important business trends. The company expects Local, Getaway and potential hotel-booking revenue to support growth, but acknowledges that these offerings may have higher costs, refund exposure and lower or uncertain margins.
- Unclaimed-property reviews by multiple states relate to unexchanged promotional merger shares. The company recorded a $3.0 million charge in 2012, but stated that additional exposure could be approximately $18.1 million above the accrued amount, plus possible interest and penalties, if claims were upheld in full.
- The company faces securities class-action and shareholder derivative litigation relating to historical growth disclosures, the Getaway business and alleged insider trading. Potential losses were not estimable.
- A patent-infringement lawsuit was filed against Fly.com’s metasearch service; potential losses were not estimable.
- Unrecognized tax benefits were approximately $9.4 million, with accrued interest and penalties bringing related tax liabilities to approximately $10.0 million. Tax examinations are ongoing.
- Voucher refunds, merchant performance, gift-card and abandoned-property laws, payment processing, privacy and Internet regulation could affect liquidity, revenue and profitability.
- Foreign currency exposure exists in Canada and Europe. The filing estimates that a hypothetical 10% adverse currency movement would have caused an incremental $86,000 foreign-exchange loss for 2012.
- Operating lease and purchase commitments totaled $17.6 million at year-end, including $15.5 million of operating leases and $2.1 million of purchase obligations.
Most important facts for investors to verify
- Whether Local and Getaway growth can offset continuing declines in Search and traditional Travel advertising.
- The recurring operating margin excluding the $3.0 million merger-share contingency charge and the prior-year $20.0 million charge.
- The adequacy of reserves for unclaimed-property claims, voucher refunds, litigation and uncertain tax positions.
- Whether higher headcount, marketing, customer service, payment-processing and hotel-platform costs are producing sufficient incremental revenue.
- The geographic location and repatriation tax implications of the $25.0 million of cash held outside the United States.
- The effect of the controlling shareholder’s approximately 50.5% ownership on governance and capital-allocation decisions.
- Whether fourth-quarter weakness in operating income and net income represents normal seasonality or a deterioration in demand and operating leverage.