Travelzoo Form 10-Q Summary
Business Context and Reporting Period
Travelzoo provides travel, entertainment and lifestyle deals through its website, mobile applications, email publications and third-party network. Revenue is generated primarily from advertising fees, with additional transaction-based revenue from Local Deals, Getaway vouchers and hotel bookings. The filing covers the three and six months ended June 30, 2018, compared with the same periods in 2017.
Travelzoo operates through Asia Pacific, Europe and North America. The company reported approximately 29.8 million members at June 30, 2018. Azzurro Capital, controlled by founder Ralph Bartel, owned approximately 53.8% of outstanding shares.
Key Financial Metrics
| Metric | Q2 2018 | Q2 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Revenue | $28.1 million | $26.4 million | $59.0 million | $54.8 million |
| Gross profit | $25.1 million | $23.2 million | $52.6 million | $48.4 million |
| Gross margin | 89.3% | 87.8% | 89.1% | 88.3% |
| Income from operations | $1.1 million | $1.4 million | $4.7 million | $3.4 million |
| Operating margin | 3.8% | 5.2% | 8.0% | 6.3% |
| Net income | $0.5 million | $0.7 million | $3.0 million | $3.4 million |
| Diluted net income per share | $0.04 | $0.05 | $0.24 | $0.26 |
Six-month operating cash flow was $780,000, compared with cash used in operations of $2.0 million in the prior-year period. Investing cash flow was negative $3.6 million, primarily reflecting a $3.1 million investment in WeekenGO and $507,000 of capital expenditures. Cash, cash equivalents and restricted cash totaled $20.9 million at June 30, 2018, including $19.4 million of cash and cash equivalents.
Total assets were $45.6 million and stockholders’ equity was $17.4 million at June 30, 2018. No debt or borrowing balance was reported on the condensed consolidated balance sheet. Current liabilities were $25.4 million, including $14.3 million of accounts payable. Local Deals and Getaway merchant payables included in accounts payable were $8.8 million.
Material Changes Versus Prior Comparable Period
- Revenue increased 6.3% in the second quarter and 7.5% for the six-month period.
- Travel revenue increased to $23.9 million in the second quarter and $50.9 million for six months, while Local revenue increased to $4.1 million and $8.0 million, respectively.
- North America revenue increased 5.7% in the quarter and 5.8% year to date; Europe revenue increased 7.6% and 10.7%, respectively; Asia Pacific revenue increased 5.8% and 8.6%, respectively.
- Gross margin improved due primarily to lower cost of revenues, but operating margin declined in the quarter as sales and marketing and general and administrative expenses grew faster than revenue.
- Sales and marketing expense increased 10.0% in the quarter and 5.4% year to date. General and administrative expense increased 13.7% and 9.9%, respectively.
- Six-month net income declined because the 2017 period included $1.9 million of after-tax income from discontinued operations, including the gain on sale of the Fly.com domain name. Continuing-operations income increased from $1.5 million to $3.0 million.
- Cash increased from negative operating cash flow in the prior-year period to positive operating cash flow in 2018, but total cash, cash equivalents and restricted cash declined by $3.1 million from year-end 2017.
Guidance, Outlook, Risks and Unusual Items
- Management stated that cash on hand is expected to fund working capital and capital requirements for at least the next twelve months. No formal revenue or earnings guidance was provided.
- Management expects continued investment in sales and marketing, product development, international expansion, mobile offerings and the hotel booking platform. These investments may pressure profitability and cash flow.
- Asia Pacific remained loss-making, with a six-month operating loss of $3.2 million, compared with $2.7 million in the prior year. Europe and North America remained profitable.
- Travelzoo invested EUR 2.5 million for a 25% interest in WeekenGO, a German vacation-package technology start-up. WeekenGO also entered into a EUR 1.5 million advertising insertion order with Travelzoo; related second-quarter advertising services were not material.
- The company adopted the new revenue recognition standard on January 1, 2018. The adoption increased retained earnings by approximately $1.3 million and changed the treatment of certain unredeemed vouchers; the reported quarterly impact was not material.
- Tax expense was $631,000 in the quarter and $1.9 million for six months. Effective tax rates were 57% and 40%, respectively, and may fluctuate with geographic income mix, foreign losses and ongoing evaluation of the Tax Cuts and Jobs Act.
- Contractual commitments totaled $22.6 million at June 30, 2018, consisting primarily of operating leases. A subsequent lease termination reduced commitments by approximately $769,000 over 2018 through 2020.
- The company has an ongoing voluntary cash program for certain former Travelzoo.com Corporation promotional shareholders. No payments were made in the reported periods, but the ultimate cost cannot be reliably estimated.
- Principal risks include competition, dependence on advertising and email traffic, mobile platform changes, declining consumer demand for vouchers, hotel-platform execution, foreign exchange volatility, international operating losses, tax and regulatory exposure, cybersecurity and privacy matters, and potential litigation.
- A March 2018 authorization permits repurchases of up to 500,000 shares. No shares were repurchased during the quarter; after quarter-end, 177,388 shares were repurchased for $2.4 million through August 1, 2018.
Most Important Facts to Verify
- Whether revenue growth can offset rising sales, marketing, personnel and product-development costs.
- The sustainability of positive operating cash flow after the WeekenGO investment and ongoing capital commitments.
- Progress toward reducing Asia Pacific operating losses and the performance of the hotel platform and new package offerings.
- The effect of voucher redemption, refund, merchant-payable and gift-card or unclaimed-property obligations on liquidity.
- Potential changes in effective tax rates, Tax Act estimates, uncertain tax positions and foreign withholding taxes.
- The financial impact of the 25% WeekenGO investment and related advertising arrangement.
- Post-quarter-end share repurchases and their effect on cash, share count and capital allocation.