Travelzoo 2021 Q3 Form 10-Q Summary
Business Context and Reporting Period
Travelzoo is a global Internet media company providing travel, entertainment and lifestyle deals to approximately 30.7 million members through digital publications, websites, applications and social media. Revenue is generated primarily from advertising fees, voucher-related transactions, hotel commissions and Jack’s Flight Club subscription fees.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Reportable segments are Travelzoo North America, Travelzoo Europe and Jack’s Flight Club. Asia Pacific operations were exited in 2020 and are presented as discontinued operations.
Financial Performance and Key Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $15.7 million | $13.8 million | $49.1 million | $41.1 million |
| Gross profit | $12.7 million | $10.9 million | $40.5 million | $33.4 million |
| Gross margin | 80.9% | 78.8% | 82.6% | 81.1% |
| Operating income (loss) | $(0.3) million | $(1.2) million | $2.4 million | $(13.2) million |
| Operating margin | (1.7%) | (8.7%) | 5.0% | (32.0%) |
| Net income (loss) attributable to Travelzoo | $2.8 million | $(1.4) million | $4.2 million | $(14.2) million |
| Diluted EPS | $0.22 | $(0.12) | $0.32 | $(1.25) |
- Q3 revenue increased 13.8% year over year; nine-month revenue increased 19.3%.
- Q3 gross profit increased 16.9%, while gross margin expanded 210 basis points.
- Q3 operating loss narrowed despite higher sales and marketing expense. Nine-month operating results shifted to profitability, aided by revenue recovery and lower operating expenses.
- Other income was $3.3 million in Q3 and $3.9 million for the nine months, primarily reflecting approximately $3.6 million of gains from forgiveness of Paycheck Protection Program loans.
- Q3 revenue by segment was $9.7 million in North America, $5.2 million in Europe and $0.8 million at Jack’s Flight Club. Nine-month operating profit was $2.7 million in North America, while Europe reported a $0.3 million loss and Jack’s Flight Club reported $0.1 million of profit.
- Cash and cash equivalents were $65.2 million at September 30, 2021, compared with $63.1 million at December 31, 2020. Including restricted cash and discontinued operations, total cash, cash equivalents and restricted cash was $66.4 million.
- Cash provided by operating activities was $9.3 million for the nine months, compared with $37.6 million in the prior-year period. Capital expenditures were $24,000.
- The company reported no outstanding debt after PPP loan forgiveness. Operating lease liabilities totaled $13.2 million, including $3.5 million current and $9.7 million long term.
Material Changes Versus the Prior Comparable Period
- North America revenue increased $0.5 million in Q3 and $7.4 million for the nine months. Higher Top 20 and Newsflash revenue and improved hotel commissions contributed to growth; Q3 Getaways voucher revenue declined $3.6 million.
- Europe revenue increased $1.6 million in Q3 and $0.6 million for the nine months, with Q3 growth driven by Getaways, Top 20 and Newsflash revenue, Local Deals and favorable currency movements.
- Jack’s Flight Club revenue declined $0.2 million in Q3 and was broadly comparable for the nine-month comparison period. Subscribers totaled approximately 1.7 million at September 30, 2021.
- Sales and marketing expense increased 11.3% in Q3, primarily from member acquisition costs, but declined 10.2% for the nine months due to lower facilities, marketing, headcount and software costs.
- Product development expense increased in Q3 but declined 20.6% for the nine months. General and administrative expense was broadly flat in Q3 and declined 15.1% for the nine months.
- The prior-year nine-month period included $2.9 million of impairment charges for goodwill and intangible assets; no impairment indicators were identified in 2021.
- Discontinued operations generated a $5,000 loss for the nine months of 2021, compared with a $3.9 million loss in the prior-year period.
Liquidity, Outlook, Risks and Unusual Items
- Management expects cash on hand as of September 30, 2021 to cover working capital needs for at least the next twelve months. However, the company reported negative working capital of approximately $18.0 million because $73.2 million of merchant payables related to unredeemed vouchers were classified as current.
- Merchant payables are generally due when vouchers are redeemed, with voucher maturities ranging from October 2021 through December 2023. Faster-than-expected redemptions, continued losses or lower operating cash flow could require additional financing.
- Unredeemed vouchers totaled approximately $18.3 million, with an estimated $3.1 million refund liability at September 30, 2021. Changes in redemption, refund or merchant-credit conditions could materially affect revenue and cash flow.
- Management cited a recovery trend as travel markets reopened, but COVID-19, including new variants, remained a material risk to travel demand, advertising, hotel and travel partners, voucher redemptions and refunds.
- Management did not anticipate needing new debt or equity financing in the ordinary course, although financing could become necessary if business conditions deteriorate or redemption activity accelerates.
- The company entered into a related-party license agreement with Azzurro Brands, an affiliate of its largest shareholder, requiring quarterly payments of $413,000. A $894,000 initial payment and a $701,000 subsequent payment were recorded or prepaid during 2021.
- Travelzoo repurchased 100,000 shares from its chief executive officer for $1.6 million in March 2021. A separate repurchase program had 395,029 shares remaining at September 30, 2021; 91,015 additional shares were repurchased after quarter-end for $925,000.
- Purchase commitments were approximately $3.4 million. Potential payments under the former Netsurfers promotional-share program remain indeterminable, and the company disclosed approximately $1.3 million of unrecognized tax benefits including interest.
- Management concluded that disclosure controls and procedures were effective and reported no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether revenue recovery continues as travel advertising and voucher demand normalize, particularly in North America and Europe.
- The timing and magnitude of voucher redemptions, merchant payments and customer refunds relative to the $73.2 million merchant-payable balance.
- The sustainability of operating cash flow excluding the non-recurring benefit from PPP loan forgiveness.
- The effect of member-acquisition spending and the related-party Azzurro Brands license on future profitability.
- COVID-19 variants, travel restrictions, advertiser cancellations, payment-processing risks and potential changes in consumer demand.
- Future tax rates, uncertain tax positions, litigation exposure and potential obligations under the Netsurfers promotional-share program.