Business Context and Reporting Period
Company: Travelzoo Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
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 engine (SuperSearch). The company operates in three segments: North America, Europe, and Asia Pacific. As of November 1, 2007, 14,250,479 shares of common stock were outstanding.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2006 |
|---|---|---|---|
| Revenues | $19,943 | $59,798 | $51,873 |
| Cost of Revenues | $563 | $1,360 | $782 |
| Gross Profit | $19,380 | $58,438 | $51,091 |
| Operating Expenses | $14,442 | $40,269 | $29,009 |
| Income from Operations | $4,938 | $18,169 | $22,082 |
| Net Income | $2,154 | $9,063 | $12,518 |
| Diluted EPS | $0.14 | $0.56 | $0.74 |
Liquidity and Balance Sheet Highlights (in thousands)
- Cash and Cash Equivalents: $23,253 (Sep 30, 2007) vs. $33,415 (Dec 31, 2006).
- Total Assets: $36,569.
- Total Liabilities: $10,543 (Current: $9,347; Long-term: $1,196).
- Stockholders' Equity: $26,026.
- Debt: The company has no outstanding debt.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 13% for the quarter and 15% for the nine-month period compared to the prior year. Growth was driven by a 6% average price increase in North America, new clients, and volume increases. Europe contributed 27-28% of revenue growth.
- Profitability Decline: Operating margin decreased to 24.8% for the quarter and 30.4% for the nine-month period (down from 46.3% and 42.6% respectively in 2006). Net income dropped 53% for the quarter and 28% for the nine-month period.
- Expense Increases: Sales and marketing expenses rose significantly (57% for the quarter, 41% for the nine months) due to increased advertising spend for subscriber acquisition and higher headcount. General and administrative expenses also increased due to headcount growth and professional services.
- Segment Performance:
- North America: Remained profitable but saw operating margins compress (38.5% for the quarter vs. 50.5% prior year).
- Europe: Revenues grew 67% (quarter) and 94% (nine months), but the segment reported an operating loss of $1.4 million (quarter) and $3.3 million (nine months) due to heavy startup costs in Germany and France.
- Asia Pacific: Operations began in April and August 2007; no revenue generated yet, with operating losses of $706,000 (quarter) and $1.1 million (nine months).
- Stock Repurchases: The company completed a $19.8 million repurchase of 1.0 million shares during the nine months ended September 30, 2007.
Guidance, Outlook, and Risks
- Outlook: Management expects continued expansion into foreign markets (Australia, China, India, South Korea) and development of the Travelzoo Network affiliate program. These initiatives are expected to result in significant operating losses and a material negative impact on operating margins in the near term. Profitability in 2008 is not assured.
- Subscriber Acquisition Costs: Average cost per new subscriber in North America increased to $3.92 in Q3 2007 from $1.86 in Q3 2006, driven by rising online advertising rates and competition.
- Key Risks:
- Customer Concentration: Two clients (Travelport Limited and Expedia, Inc.) accounted for 15% and 11% of revenues, respectively, in the nine months ended September 30, 2007.
- Legal Contingency: Potential claims from former stockholders of Travelzoo.com Corporation regarding unissued shares from a 2002 merger. If fully successful, this could require the issuance of up to 4,070,000 additional shares. The company has a cash payment program for valid claims, with $94,000 expensed in the nine months ended Sep 30, 2007.
- International Expansion: Significant risks associated with managing foreign operations, currency fluctuations, and regulatory environments.
Investor Verification Checklist
- Verify the sustainability of revenue growth given the 53% drop in quarterly net income and declining operating margins.
- Assess the impact of rising customer acquisition costs on future profitability, particularly in the North America segment.
- Monitor the financial impact of the Europe and Asia Pacific expansion, which are currently operating at significant losses.
- Review the status of the legal contingency regarding the 2002 merger and potential share issuance or cash payments to former stockholders.
- Confirm the concentration risk associated with the top two clients (Travelport and Expedia) representing over 25% of total revenue.