Business Context and Reporting Period
Company: Travelzoo Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2006
Business Overview: Travelzoo is an 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 two segments: North America (U.S. and Canada) and Europe (U.K., Germany, Spain). Revenue is derived entirely from advertising sales.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2006 |
Nine Months Ended Sep 30, 2006 |
Nine Months Ended Sep 30, 2005 |
|---|---|---|---|
| Revenues | $17,586 | $51,873 | $36,871 |
| Cost of Revenues | $232 | $782 | $629 |
| Gross Profit | $17,354 | $51,091 | $36,242 |
| Operating Income | $8,131 | $22,082 | $11,346 |
| Net Income | $4,551 | $12,518 | $6,309 |
| Diluted EPS | $0.28 | $0.74 | $0.35 |
| Cash & Equivalents | $27,977 (as of Sep 30, 2006) | ||
| Short-term Investments | $0 (as of Sep 30, 2006) | ||
| Total Assets | $38,918 (as of Sep 30, 2006) | ||
| Total Liabilities | $6,432 (as of Sep 30, 2006) |
Margins (Nine Months 2006):
- Gross Margin: 98.5%
- Operating Margin: 42.6%
- Net Margin: 24.1%
Liquidity & Debt: The company has no outstanding debt. Cash and cash equivalents totaled $27.9 million as of September 30, 2006. Short-term investments were liquidated during the period.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 31% year-over-year for the quarter and 41% for the nine-month period. Growth was driven by a 13% average price increase for advertising placements and increased volume from existing and new clients.
- Profitability: Operating income surged 94% for the nine-month period. Operating margin improved from 30.8% to 42.6% due to lower sales and marketing expenses as a percentage of revenue and reduced costs related to the former stockholder payment program.
- Share Repurchases: The company completed a $28.6 million share repurchase program during the nine months ended September 30, 2006, retiring 1.0 million shares. This significantly reduced cash reserves compared to the prior year.
- Segment Performance:
- North America: Revenues grew 36% (9 months); Operating income grew 96%.
- Europe: Revenues grew 501% (9 months) as operations expanded, though the segment remained unprofitable with an operating loss of $1.2 million.
Guidance, Outlook, and Risks
Outlook & Strategy:
- Management plans to expand into France in 2007 and the Asia Pacific region in 2007-2008.
- Plans to launch "Travelzoo Extra" for non-travel deals and "Travelzoo Network" for affiliate sites.
- Management expects sales and marketing expenses to fluctuate and potentially increase as a percentage of revenue due to competitive pressures and subscriber acquisition costs.
Risks & Contingencies:
- Customer Concentration: Two clients (Travelport Limited and Expedia, Inc.) accounted for 17% and 15% of revenues in Q3 2006, respectively. Loss of either could materially impact results.
- Former Stockholder Claims: A program exists to pay cash to former stockholders of Travelzoo.com Corporation who missed a merger deadline. While $124,000 was expensed in the nine months ended Sep 30, 2006, the total liability is not reliably estimable. Up to 4.07 million shares could theoretically be claimed, causing dilution.
- International Expansion: European operations are currently loss-making. Future expansion into new regions carries risks of increased expenses and potential losses.
- Subscriber Acquisition Costs: Rising online advertising rates may increase the cost to acquire new subscribers, potentially compressing margins.
Investor Verification Checklist
- Customer Concentration: Verify the stability of contracts with Travelport and Expedia, which represent over 30% of total revenue.
- Stockholder Liability: Monitor the number of valid claims received under the former stockholder payment program and the associated cash outflows, as the total cost remains uncertain.
- Subscriber Acquisition Costs: Track the "Average Cost per Acquisition" metric to ensure it does not rise significantly, which could erode the high operating margins.
- European Profitability: Assess the timeline for the Europe segment to reach profitability given the current operating losses.
- Cash Position: Confirm that the remaining cash balance ($28.0 million) is sufficient to fund planned international expansions without requiring dilutive equity financing.