Travelzoo 2020 Q1 Form 10-Q Summary
Business context and reporting period
Travelzoo is a global Internet media company offering travel, entertainment and lifestyle deals to approximately 30 million members. Revenue is generated primarily from advertising fees, voucher transactions and hotel-related commissions. The unaudited quarterly report covers the three months ended March 31, 2020, with comparisons to March 31, 2019.
Travelzoo acquired 60% of Jack’s Flight Club in January 2020, adding a subscription-based flight-deal business with approximately 1.7 million members. In March 2020, Travelzoo exited its loss-making Asia Pacific business, which is presented as discontinued operations.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $20.3 million | $29.2 million | Down 30.3% |
| Gross profit | $17.6 million | $26.3 million | Down 33.0% |
| Gross margin | 86.7% | 90.2% | Down 3.5 percentage points |
| Operating income (loss) | $(5.3) million | $6.6 million | Declined $11.9 million |
| Net income (loss) attributable to Travelzoo | $(6.6) million | $3.1 million | Declined $9.7 million |
| Continuing operations attributable to Travelzoo | $(3.7) million | $4.9 million | Turned to loss |
| Discontinued operations | $(2.9) million | $(1.8) million | Loss increased |
| Basic loss per share | $(0.58) | $0.26 | Declined $0.84 |
| Net cash from operating activities | $(3.1) million | $3.4 million | Declined $6.5 million |
Operating expenses were $23.0 million, or 113.0% of revenue, versus $19.7 million, or 67.7%, in the prior-year quarter. Expenses included $2.9 million of impairment charges, consisting of $2.1 million for goodwill and $810,000 for an acquired trade name, primarily reflecting COVID-19-related deterioration in Jack’s Flight Club’s estimated value. The company also recorded approximately $1.4 million of provisions for accounts receivable and other losses.
As of March 31, 2020, cash and cash equivalents were $12.1 million, compared with $18.7 million at December 31, 2019. Cash, cash equivalents and restricted cash totaled $14.4 million. Accounts receivable were $7.7 million, net of a $2.3 million allowance. Current liabilities included $10.0 million of promissory notes payable. Operating lease liabilities totaled $17.7 million.
Material changes versus the prior comparable period
- Revenue decreased by $8.8 million, driven by reduced advertising and voucher activity in North America and Europe. North America revenue declined to $12.7 million from $18.6 million, while Europe declined to $6.9 million from $10.6 million.
- Travel revenue decreased to $17.4 million from $25.8 million, and Local revenue decreased to $2.3 million from $3.3 million.
- Jack’s Flight Club contributed $683,000 of revenue from its January 13 acquisition date through March 31, 2020, but reported a segment operating loss of $3.0 million, including impairment-related effects.
- North America operating margin declined to negative 7.7% from positive 24.0%; Europe declined to negative 19.3% from positive 20.2%.
- Members in North America and Europe totaled approximately 26.1 million, down from 26.4 million. Consolidated revenue per member declined to $2.79 from $4.45.
- Asia Pacific revenue declined to $904,000 from $1.7 million and generated a $2.9 million discontinued-operations loss, including $1.6 million of severance and disposal costs.
- Travelzoo repurchased approximately 168,600 shares for $1.2 million during the quarter, reducing shares outstanding to approximately 11.3 million at March 31, 2020.
Guidance, outlook, commentary, risks and unusual items
The filing provides no formal quantitative revenue or earnings guidance. Management expects COVID-19 to continue negatively affecting 2020 results and stated that the second quarter of 2020 was expected to be affected more significantly than the first quarter.
- COVID-19 caused advertising partners to pause, cancel or stop campaigns, while hotel and travel partners experienced significant cancellations and voucher customers requested refunds.
- Management extended voucher expiration dates and offered greater refundability, while pursuing employee furloughs, expense reductions and renegotiation of contracts and leases.
- Management stated that cash on hand was expected to support working capital and capital expenditures for at least the next twelve months, but warned that weaker-than-expected performance could require additional equity or debt financing or further reductions in operations.
- After quarter-end, Travelzoo received $3.6 million of Paycheck Protection Program loans, consisting of $3.1 million on April 24 and $535,000 on May 5, 2020. The company intended to seek forgiveness of eligible amounts.
- In June 2020, the Jack’s Flight Club purchase obligation was amended: $1.5 million was forgiven, $6.8 million plus interest was paid, and $1.7 million was deferred to June 2021 at 12% interest and secured by 9.7% of the acquired shares. The company expected to record the accounting impact in the second quarter.
- Travelzoo completed the sale of its Japan business for JPY 1 on June 16, 2020, while providing an interest-free JPY 46.0 million loan to the buyer.
- Additional risks include further goodwill or intangible-asset impairments, foreign-currency exposure, customer refunds and bad debts, lease obligations, uncertain tax positions and the undeterminable cost of the legacy Netsurfers promotional-share payment program.
Most important facts for investors to verify
- Whether COVID-19-driven declines in advertising, travel demand and voucher activity continued or worsened after March 31, 2020.
- The company’s post-quarter cash balance, use and potential forgiveness of the PPP loans, and ability to fund lease, payroll and acquisition-related obligations.
- The final accounting treatment and cash requirements arising from the amended Jack’s Flight Club purchase agreement.
- Whether additional impairments, bad-debt provisions or refund liabilities were recognized in subsequent quarters.
- The sustainability of management’s twelve-month liquidity assessment given negative operating cash flow in Q1 2020 and continuing pandemic-related uncertainty.
- The financial effect of the Asia Pacific exit and Japan divestiture, including any remaining liabilities or separation costs.