Business Context and Reporting Period
Company: Travelzoo Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: Travelzoo is a global Internet media company providing travel and entertainment deal information via websites, email newsletters (Top 20, Newsflash), and search tools (SuperSearch, Fly.com). The company operates in three segments: North America, Europe, and Asia Pacific.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Revenues | $23,368 | $20,948 |
| Cost of Revenues | $1,263 | $529 |
| Gross Profit | $22,105 | $20,419 |
| Operating Expenses | $19,284 | $19,140 |
| Income from Operations | $2,821 | $1,279 |
| Net Income (Loss) | $338 | $(1,006) |
| Cash and Cash Equivalents (End of Period) | $15,644 | $24,445 |
| Net Cash Provided by Operating Activities | $2,069 | $3,647 |
| Net Cash Used in Investing Activities | $(2,644) | $(1,717) |
Margins: Gross margin was 94.6% in Q1 2009 (down from 97.5% in Q1 2008). Operating margin improved to 12.1% from 6.1% in the prior year period.
Debt: The company has no outstanding debt.
Liquidity: Cash and cash equivalents totaled $15.6 million as of March 31, 2009.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 12% year-over-year to $23.4 million. North America revenue grew 6%, Europe grew 45% (100% in local currency), and Asia Pacific grew significantly from $20,000 to $388,000.
- Profitability: The company returned to profitability with a net income of $338,000, compared to a net loss of $1,006,000 in Q1 2008. This was driven by a decrease in sales and marketing expenses as a percentage of revenue.
- Operating Expenses: Sales and marketing expenses decreased by $1.1 million to $12.3 million, primarily due to reduced advertising spend for subscriber acquisition. General and administrative expenses increased by $1.2 million to $6.9 million, driven by higher salaries and bad debt provisions.
- Intangible Assets: Intangible assets increased significantly from $45,000 to $1.7 million due to the $1.8 million purchase of the fly.com domain name in January 2009.
- Customer Concentration: Orbitz Worldwide accounted for 13% of total revenues in Q1 2009 (12% in Q1 2008).
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects operations in Europe and Asia Pacific to incur significant losses for the next 18 months to three years. The company intends to fund growth from cash on hand but may need to raise additional capital if market conditions worsen or expansion costs exceed expectations.
- Strategic Review: In February 2009, the Board began reviewing strategic alternatives for the Asia Pacific business due to cash burn in that region.
- Tax Contingency: The IRS issued a Notice of Proposed Adjustment in January 2009 contesting tax deductions from 2005-2006 related to a program paying former stockholders. If agreed to, this could result in an additional payment of approximately $548,000 plus interest by the end of 2009.
- Legal Contingency (Former Stockholders): There is a risk of claims from former stockholders of Travelzoo.com Corporation regarding unissued shares from a 2002 merger. If fully successful, claims could require the issuance of up to 4,068,000 additional shares, causing significant dilution. A cash payment program for these former stockholders incurred a $1,000 expense in Q1 2009.
- Risks: Key risks include dependence on the travel industry (sensitive to recessions), intense competition, foreign currency fluctuations, and the inability to maintain profitability in international markets.
Investor Verification Checklist
- Customer Concentration: Verify the stability of the relationship with Orbitz Worldwide, which represents 13% of revenue.
- International Losses: Monitor the cash burn rate in Europe and Asia Pacific segments, which are currently operating at a loss.
- Tax Liability: Track the resolution of the IRS Notice of Proposed Adjustment regarding the $548,000 potential tax liability.
- Share Dilution Risk: Assess the status of potential claims from former stockholders of Travelzoo.com Corporation that could result in the issuance of ~4 million new shares.
- Subscriber Acquisition Costs: Review trends in the cost per acquisition (CPA) of new subscribers, which has historically increased and impacts marketing efficiency.