Business Context and Reporting Period
Company: Travelzoo Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: Travelzoo is a global Internet media company publishing travel offers via websites, email newsletters (Top 20, Newsflash), and a pay-per-click search tool (SuperSearch). The company operates in three segments: North America, Europe, and Asia Pacific. As of November 3, 2008, Ralph Bartel beneficially owned approximately 58.1% of outstanding shares.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Revenues | $18,807 | $61,525 |
| Cost of Revenues | $867 | $2,034 |
| Gross Profit | $17,940 | $59,491 |
| Operating Expenses | $18,299 | $56,889 |
| Income (Loss) from Operations | $(359) | $2,602 |
| Net Income (Loss) | $(1,789) | $(3,988) |
| Cash and Cash Equivalents (End of Period) | $15,836 | $15,836 |
| Net Cash Used in Operating Activities | N/A | $(2,816) |
| Net Cash Used in Investing Activities | N/A | $(3,826) |
Margins (Nine Months 2008): Gross Margin was 96.7%. Operating Margin was 4.2%. Net Margin was -6.5%.
Debt and Liquidity: The company reported no outstanding debt. Total current liabilities were $11.6 million. Cash and cash equivalents decreased by $6.8 million during the nine-month period.
Material Changes vs. Prior Period
- Revenue: For the nine months ended September 30, 2008, revenue increased 3% to $61.5 million compared to $59.8 million in the prior year. However, for the three-month period, revenue decreased 6% to $18.8 million.
- Profitability: The company reported a net loss of $3.988 million for the nine months ended September 30, 2008, compared to net income of $9.063 million in the same period in 2007. Operating income dropped from $18.2 million (2007) to $2.6 million (2008).
- Expenses: Operating expenses increased significantly. Sales and marketing expenses rose 21% year-over-year for the nine-month period ($37.5 million vs. $31.0 million). General and administrative expenses nearly doubled, increasing 95% to $19.4 million from $9.9 million, driven by headcount increases and professional services.
- Segment Performance:
- North America: Revenue decreased 3% for the nine months. Operating income declined from $22.5 million to $17.4 million.
- Europe: Revenue increased 64% to $7.2 million, but operating loss widened to $6.5 million from $3.3 million due to heavy investment in subscriber acquisition.
- Asia Pacific: Generated $317,000 in revenue (no revenue in prior year) but incurred an operating loss of $8.3 million.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Strategy: Management expects operations in Europe and Asia Pacific to incur significant losses in the foreseeable future due to subscriber acquisition costs. The company plans to launch a new travel search engine in 2008 and continue developing the Travelzoo Network. Management believes cash on hand is sufficient for working capital needs for at least the next 12 months but may require additional financing if expansion costs exceed expectations.
Unusual Items:
- Tax Provision: The effective tax rate for the nine months ended September 30, 2008, was 235%. This high rate was driven by losses in Europe and Asia Pacific that provided no recognizable tax benefit.
- Former Stockholder Program: The company continues a program to make cash payments to former stockholders of Travelzoo.com Corporation who missed a 2002 merger deadline. Expenses for this program were $14,000 for the nine months ended September 30, 2008. The total liability is not reliably estimable.
Risk Factors:
- Profitability: No assurance of future profitability; North American revenue decline combined with rising expenses threatens margins.
- Customer Concentration: One client (Travelport Limited) accounted for 12% of revenue for the nine months ended September 30, 2008.
- International Expansion: Significant losses in new markets (Europe, Asia Pacific) and exposure to foreign currency fluctuations.
- Legal Uncertainty: Potential claims from former stockholders could result in the issuance of up to 4.1 million additional shares, causing dilution.
Investor Verification Checklist
- Verify the sustainability of the 64% revenue growth in Europe against the widening operating losses ($6.5 million).
- Confirm the trajectory of North American revenue, which declined 3% year-over-year despite being the primary profit center.
- Assess the impact of the 235% effective tax rate on future net income projections.
- Monitor the "Former Stockholder" liability program for potential dilution risks (up to 4.1 million shares).
- Review the cash burn rate in international segments ($8.1 million in Asia Pacific and $6.0 million in Europe for the nine months) against total cash reserves of $15.8 million.