Business Context and Reporting Period
Company: Travelzoo Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: Travelzoo is a global Internet media company providing travel and entertainment deal information to over 21 million subscribers via websites, email newsletters (Top 20, Newsflash), and search tools (SuperSearch, Fly.com). Revenue is generated primarily through advertising fees. The company operates in two segments: North America and Europe. The Asia Pacific segment was sold in October 2009 and is reported as discontinued operations.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2010 |
Three Months Ended June 30, 2009 |
Six Months Ended June 30, 2010 |
Six Months Ended June 30, 2009 |
|---|---|---|---|---|
| Revenues | $28,106 | $23,638 | $56,624 | $46,618 |
| Gross Profit | $26,490 | $22,180 | $53,354 | $43,943 |
| Operating Income | $5,936 | $3,370 | $11,096 | $7,904 |
| Net Income (Continuing Ops) | $3,247 | $1,608 | $5,721 | $3,648 |
| Net Income (Total) | $3,247 | $(191) | $5,721 | $146 |
| Cash and Equivalents | $31,875 | $19,776 (Dec 31, 2009) | $31,875 | $19,776 (Dec 31, 2009) |
| Operating Cash Flow (6mo) | $12,049 | $2,071 | ||
| Operating Margin (3mo) | ||||
| Operating Margin (6mo) | 21.2% | 14.2% | 19.6% | 17.0% |
Debt and Liquidity: The company has no outstanding debt. Total current assets were $48.5 million against current liabilities of $13.7 million as of June 30, 2010.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 19% year-over-year for the quarter and 21.5% for the six-month period.
- North America: Revenue grew 12% (quarter) and 12% (six months), driven by publication and search product growth.
- Europe: Revenue grew 49% (quarter) and 74% (six months), driven by subscriber growth and rate increases, though partially offset by foreign exchange impacts.
- Profitability: Operating income increased significantly due to improved operating margins. Operating expenses as a percentage of revenue decreased.
- North America: Operating margin improved to 30.4% (quarter) and 28.8% (six months).
- Europe: Operating loss narrowed to $808,000 (quarter) and $1.8 million (six months) compared to losses of $1.1 million and $2.3 million in the prior year periods.
- Discontinued Operations: The Asia Pacific segment was sold in late 2009. The 2009 comparative periods include losses from discontinued operations, whereas 2010 results reflect only continuing operations.
- Cash Flow: Net cash provided by operating activities increased to $12.0 million for the six months ended June 30, 2010, compared to $2.1 million in the prior year, primarily due to higher net income and a decrease in income tax receivables.
Guidance, Outlook, and Risks
- Outlook: Management expects operations in Europe to incur losses through the end of 2010 due to subscriber acquisition costs and the launch of Fly.com. The company anticipates continued increases in sales, marketing, and general administrative expenses to support growth.
- Strategy: Focus remains on international expansion (Europe), expanding product scope into entertainment, and growing the Fly.com meta-search engine.
- Tax Contingency: The company reached a tentative settlement with the IRS regarding 2005 and 2006 tax years. It expects to pay approximately $544,000 in the third quarter of 2010, which will result in a net decrease in tax expense of approximately $160,000 due to the release of previously established liabilities.
- Key Risks:
- Profitability: No assurance of future profitability; results may fluctuate due to marketing spend and economic conditions.
- Competition: Intense competition from portals, search engines, and travel agencies may pressure advertising rates.
- Legal/Stockholder Claims: Potential claims from former stockholders of Travelzoo.com Corporation regarding unissued shares from a 2002 merger could result in the issuance of up to 4.1 million additional shares, causing dilution.
- Concentration: Ralph Bartel controls approximately 66.3% of outstanding shares.
Investor Verification Checklist
- Europe Profitability Timeline: Verify the timeline for European operations to reach profitability, as losses are expected to continue through 2010.
- IRS Settlement Impact: Confirm the finalization of the IRS settlement and the exact timing of the $544,000 payment and $160,000 tax expense reduction in Q3 2010.
- Former Stockholder Liability: Assess the potential dilution risk from the 2002 merger claims, which could involve up to 4.1 million shares if claims are successful.
- Subscriber Acquisition Costs (CPA): Monitor trends in the cost per acquisition of new subscribers, particularly in Europe where CPA has fluctuated significantly.
- Revenue Mix: Track the contribution of Fly.com and search products versus traditional publication advertising to ensure diversification.