Travelzoo Inc. 2011 Q3 Form 10-Q Summary
Business Context and Reporting Period
Travelzoo is a global Internet media company that provides travel, entertainment and local-deal content through websites, email newsletters, search products and Local Deals vouchers. Revenue is generated primarily from advertising fees and voucher-related commissions. The filing covers the quarter and nine months ended September 30, 2011, compared with the same periods in 2010.
- Reportable segments: North America and Europe.
- More than 24 million subscribers were reported across North America, Europe and Asia Pacific.
- Asia Pacific operations were sold in 2009 and continue under a license and revenue-sharing arrangement.
- Ralph Bartel beneficially controlled approximately 53.3% of outstanding shares as of October 28, 2011.
Financial Performance and Key Metrics
| Metric | Q3 2011 | Q3 2010 | First 9 Months 2011 | First 9 Months 2010 |
|---|---|---|---|---|
| Revenue | $38.7 million | $27.7 million | $113.2 million | $84.3 million |
| Gross profit | $34.4 million | $26.0 million | $103.6 million | $79.3 million |
| Gross margin | 89.1% | 93.7% | 91.5% | 94.0% |
| Income from operations | $9.2 million | $5.7 million | $6.8 million | $16.8 million |
| Operating margin | 23.9% | 20.6% | 6.0% | 19.9% |
| Net income (loss) | $5.9 million | $3.7 million | $(3.1) million | $9.4 million |
| Diluted EPS | $0.36 | $0.22 | $(0.19) | $0.57 |
- North America revenue increased 32% year over year in Q3 and 27% for the nine-month period. North America operating margin was 27.8% in Q3 and 28.3% for the nine months.
- Europe revenue increased 65% in Q3 and 62% for the nine-month period. Europe generated operating income of $1.4 million in Q3 and $3.2 million for the nine months, compared with a $1.5 million operating loss in the first nine months of 2010.
- Local Deals contributed to revenue growth but also increased credit-card fees, subscriber refunds, customer service costs and other cost of revenue.
- Sales and marketing expense increased to $16.7 million in Q3 and $51.6 million for the nine months, primarily because of higher headcount, website traffic advertising and television advertising.
- General and administrative expense increased to $8.5 million in Q3 and $25.2 million for the nine months, primarily due to higher headcount, rent, office, insurance and professional-service costs.
Cash Flow, Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $32.4 million at September 30, 2011, compared with $41.2 million at December 31, 2010. Restricted cash was $3.1 million.
- Nine-month operating cash flow was $8.6 million, down from $15.1 million in the prior-year period.
- Investing cash flow was $(1.9) million, primarily for property and equipment purchases.
- Financing cash flow was $(14.8) million, primarily due to the $15.1 million repurchase of 500,000 shares.
- The company had no outstanding debt and no derivatives transactions.
- Management stated that cash on hand should fund working-capital and capital-expenditure needs for at least the next 12 months, although additional financing could be required for unexpected opportunities, expansion or weaker-than-expected performance.
- Operating lease and purchase commitments totaled approximately $15.7 million, including $14.4 million of operating lease obligations.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 40%, while nine-month revenue increased 34%.
- Q3 net income increased 62% and operating margin expanded by 3.3 percentage points.
- Nine-month net income declined from $9.4 million to a $3.1 million loss, principally because of a non-recurring $20.0 million settlement with the State of Delaware related to unclaimed property claims.
- The Delaware settlement was paid in cash on April 27, 2011, recorded as an operating expense and provided no recognizable tax benefit. The nine-month effective tax rate was consequently 145%.
- Cash declined by $8.8 million year to date, reflecting the Delaware settlement, the stock repurchase and operating and investing cash requirements.
- Gross margin declined because cost of revenues grew faster than revenue, particularly from credit-card fees, voucher refunds, customer service and third-party network payments.
- Subscriber reach expanded: North America Top 20 subscribers increased 9% and Newsflash subscribers 11%; European Top 20 and Newsflash subscribers each increased 26% year over year at September 30, 2011.
- The company completed its authorized 500,000-share repurchase program during the quarter at an aggregate cost of approximately $15.1 million.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue or earnings guidance was provided. Management expects headcount, general and administrative expenses and international expansion costs to continue increasing.
- Management expects competition and online advertising costs to place upward pressure on subscriber-acquisition costs over the long term. North American Q3 acquisition cost was $0.66 per new subscriber; Europe was $2.76.
- Key business risks include intense competition in online advertising, travel search and Local Deals; dependence on advertising demand; economic and travel-industry weakness; foreign-exchange exposure; technology outages and security breaches; payment-processing risks; and difficulty attracting and retaining personnel.
- Two putative securities class actions and five shareholder derivative actions were filed in 2011 concerning alleged misleading statements and insider stock sales. The company believes the claims are without merit, intends to defend them vigorously and cannot estimate potential losses.
- The company continues a cash-payment program for former Travelzoo.com shareholders. Future costs cannot be reliably estimated because they depend on valid claims and the company’s stock price. Approximately 1.0 million potentially eligible shares had not been claimed as of September 30, 2011, assuming all original requests were valid.
- Approximately $2.1 million of unrecognized tax benefits remained outstanding, with uncertain settlement timing.
- Foreign-currency translation reduced nine-month comprehensive income by $268,000. A hypothetical 10% adverse currency movement was estimated to produce an incremental nine-month foreign-exchange loss of $79,000.
- Disclosure controls and procedures were deemed effective as of September 30, 2011, with no material change in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether revenue growth, particularly from Local Deals and Europe, is sustainable after adjusting for foreign-exchange effects and changing voucher economics.
- Whether higher credit-card fees, refunds, customer service costs and other Local Deals expenses continue to pressure gross margin.
- The normalized nine-month earnings and cash-flow profile excluding the $20.0 million Delaware settlement.
- The status, defense costs and potential exposure from the securities and derivative litigation.
- The ultimate cost and timing of payments to former Travelzoo.com shareholders and any remaining escheat-related claims.
- Liquidity after the $15.1 million share repurchase, ongoing expansion spending and approximately $15.7 million of contractual commitments.
- Whether Europe remains profitable as subscriber-acquisition, marketing and foreign-exchange conditions change.