Travelzoo Inc. 2011 Form 10-K Summary
Business context and reporting period
Travelzoo is a global Internet media company that distributes travel, entertainment, and local deals through websites, email newsletters, search tools, Fly.com, and voucher products. Revenue is generated primarily from advertising fees and commissions on vouchers. The filing covers the fiscal year ended December 31, 2011, with quarterly information for the fourth quarter ended December 31, 2011.
The company operates through North America and Europe. North America represented 73% of 2011 revenue and Europe 27%. The former Asia Pacific operating segment was sold in 2009 and is presented as discontinued operations for all periods.
Financial results and key metrics
| Metric | 2010 | 2011 | Change |
|---|---|---|---|
| Revenue | $112.8 million | $148.3 million | 32% |
| Gross profit | $105.5 million | $135.1 million | 28% |
| Gross margin | 93.6% | 91.0% | Down 2.6 points |
| Income from operations | $23.5 million | $15.0 million | Down 36% |
| Operating margin | 20.9% | 10.1% | Down 10.8 points |
| Net income | $13.2 million | $3.3 million | Down 75% |
| Diluted earnings per share | $0.80 | $0.20 | Down $0.60 |
| Operating cash flow | $23.9 million | $15.6 million | Down $8.3 million |
| Cash and cash equivalents | $41.2 million | $38.7 million | Down $2.4 million |
Fourth-quarter 2011 revenue was $35.2 million, compared with $28.5 million in the fourth quarter of 2010. Fourth-quarter net income was $6.4 million, or $0.40 diluted earnings per share. Fourth-quarter operating income was $8.2 million; the prior-year quarter included a $20.0 million Delaware settlement charge in operating expenses.
2011 revenue growth was led by Local revenue, which increased to $34.0 million from $10.0 million, and Travel revenue, which increased to $85.2 million from $75.5 million. Search revenue increased to $29.1 million from $27.3 million. North America revenue rose to $108.5 million from $87.7 million, while Europe revenue rose to $39.8 million from $25.1 million.
Cost of revenues increased to $13.3 million from $7.3 million, primarily because of Local Deals and Getaways credit-card fees, subscriber refunds, customer service, professional services, and partner payments. Sales and marketing expense increased to $65.5 million from $54.5 million, and general and administrative expense increased to $34.5 million from $27.6 million.
North America operating income declined to $10.1 million from $25.0 million, with operating margin declining to 9% from 28%. Europe became profitable, generating $4.9 million of operating income compared with a $1.5 million operating loss in 2010; its operating margin improved to 12% from negative 6%.
Liquidity, capital resources, and debt
- Cash and cash equivalents were $38.7 million at December 31, 2011; restricted cash was $3.1 million.
- Working capital was $28.4 million, compared with $39.6 million at year-end 2010.
- The company reported no outstanding debt and no derivatives transactions.
- Operating cash flow was $15.6 million; investing cash flow was negative $2.5 million, primarily from capital expenditures; financing cash flow was negative $14.8 million, primarily from stock repurchases.
- The company repurchased 500,000 shares for $15.1 million during the third quarter of 2011.
- Management stated that cash on hand was expected to fund working capital needs and anticipated capital requirements for at least the next 12 months.
- Contractual commitments totaled $14.3 million, consisting primarily of operating leases. The filing also disclosed approximately $1.9 million of net unrecognized tax benefits for which settlement timing could not be reliably estimated.
Material changes versus the prior comparable period
- Revenue grew 32%, but profitability declined substantially because of a $20.0 million operating expense for settlement of Delaware unclaimed-property claims, higher personnel and facilities costs, and increased voucher-related costs.
- The Delaware settlement was paid in cash on April 27, 2011 and released claims relating to potentially demandable unclaimed shares. The expense provided no recognizable tax benefit and contributed to the 78% effective tax rate in 2011, compared with 44% in 2010.
- Local Deals and Getaways expanded significantly, increasing revenue but also increasing credit-card fees, refunds, customer service costs, payment obligations to merchants, and regulatory exposure.
- Consolidated subscribers increased to 21.5 million from 18.9 million, while homepage page views increased to 57.5 million from 55.6 million. Average subscriber acquisition cost declined to $1.76 from $2.28.
- Headcount increased to 350 employees from 255, contributing to higher compensation and operating expenses.
- Stockholders’ equity declined to $34.8 million from $45.9 million, primarily reflecting the stock repurchase and foreign-currency translation losses.
Guidance, outlook, management commentary, risks, and unusual items
The filing does not provide quantitative revenue or earnings guidance. Management expected continued investment in subscriber acquisition, brand marketing, sales personnel, international expansion, and new products, with potentially significant quarter-to-quarter fluctuations in cost of revenues, sales and marketing, general and administrative expenses, and taxes.
Key risks include intense competition from Internet portals, search engines, online travel agencies, and voucher providers; dependence on advertiser retention and email distribution; economic weakness affecting travel and advertising demand; execution and refund risk in Local Deals and Getaways; foreign-currency exposure; privacy, anti-spam, payment-processing, gift-card, unclaimed-property, and tax regulation; system outages and cybersecurity incidents; and dependence on key personnel.
The company disclosed securities class-action and derivative lawsuits filed in 2011 and early 2012 relating to alleged disclosures concerning growth, Getaways, and insider stock sales. The company considers the claims without merit, intends to defend them, and stated that potential losses could not be estimated.
Approximately 1.0 million shares potentially related to former Travelzoo.com Corporation stockholders remained unclaimed as of December 31, 2011, assuming all historical requests were valid. The company recorded $153,000 of 2011 expense for its cash settlement program, but the ultimate cost is not reliably estimable.
Most important facts for investors to verify
- Whether the sharp revenue growth, particularly in Local Deals and Getaways, can continue without further margin deterioration or higher refund and merchant liabilities.
- The normalized earnings and cash-flow impact excluding the $20.0 million Delaware settlement and related tax effects.
- The sustainability of Europe’s improved profitability and the effect of foreign-currency movements and European economic conditions.
- The company’s subscriber quality, engagement, email deliverability, advertiser retention, and revenue per subscriber, since reported subscriber totals may include duplicate, inactive, or undeliverable accounts.
- The status and potential financial exposure of securities, derivative, tax, voucher, and unclaimed-property matters.
- Liquidity after stock repurchases, contractual commitments, ongoing expansion spending, and potential future claims.
- Related-party arrangements involving Ralph Bartel, Azzurro Capital, the former Asia Pacific business, and affiliated personnel.