Business Context and Reporting Period
Company: Travelzoo Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Travelzoo is an Internet media company publishing travel offers from over 600 travel companies via websites, email newsletters (Top 20, Newsflash), and a pay-per-click search engine (SuperSearch). The company operates in two segments: North America (95% of revenue) and Europe (5% of revenue). It is controlled by founder Ralph Bartel, who holds approximately 50.2% of outstanding shares.
Key Financial Metrics
| Metric (in thousands) | 2006 | 2005 |
|---|---|---|
| Revenues | $69,525 | $50,772 |
| Cost of Revenues | $1,038 | $878 |
| Gross Profit | $68,487 | $49,894 |
| Operating Income | $29,753 | $14,870 |
| Net Income | $16,803 | $7,963 |
| Diluted EPS | $1.01 | $0.45 |
| Cash and Cash Equivalents | $33,415 | $24,469 |
| Working Capital | $36,472 | $48,136 |
| Total Assets | $43,700 | $55,452 |
Margins: Gross margin was 98.5% in 2006 (up from 98.3% in 2005). Operating margin improved significantly to 42.8% in 2006 from 29.3% in 2005. Net income margin was 24.2%.
Debt and Liquidity: The company has no outstanding debt. Liquidity is strong with $33.4 million in cash and cash equivalents. Net cash provided by operating activities was $17.3 million.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 37% year-over-year to $69.5 million. North America revenue grew 33%, driven by a 13% increase in advertising rates and higher volume from existing and new clients. Europe revenue grew to $3.2 million (from $0.8 million) but remains a small portion of the total.
- Profitability: Operating income more than doubled to $29.8 million. This was driven by operating leverage; sales and marketing expenses as a percentage of revenue decreased from 51% to 42%, and general and administrative expenses decreased from 18% to 14% of revenue.
- Share Repurchase: The company repurchased and retired 1 million shares of common stock in 2006 for approximately $28.6 million, reducing the share count from 16.25 million to 15.25 million.
- Subscriber Base: North America subscribers for the "Top 20" newsletter grew 8% to 9.75 million. Europe subscribers grew significantly (112% for Top 20, 167% for Newsflash) due to new market entries in Germany and Spain.
Guidance, Outlook, Risks, and Contingencies
Outlook and Strategy: Management plans to replicate its business model in foreign markets, specifically opening an office in Paris and expanding into the Asia Pacific region (Australia, China, India, Japan, South Korea) in 2007-2008. The company also intends to list show ticket offers and launch an affiliate network. Management expects sales and marketing expenses to increase as a percentage of revenue in the future due to international expansion and competitive pressures.
Risks:
- Customer Concentration: Two clients (Travelport Limited and Expedia, Inc.) accounted for 16% and 14% of total revenues, respectively. Loss of either could materially impact results.
- International Expansion: European operations incurred a loss of $1.6 million in 2006. Future expansion into Europe and Asia carries risks of currency fluctuation, regulatory changes, and significant start-up costs.
- Subscriber Acquisition Costs: The average cost to acquire a new subscriber has generally trended upward. Increased competition could further drive up these costs, pressuring margins.
- Legal Contingency (Former Stockholders): A program exists to pay cash to former stockholders of Travelzoo.com Corporation who failed to claim shares in a 2002 merger. While expenses for this program decreased to $160,000 in 2006, the total liability is not reliably estimable as it depends on future stock prices and the number of valid claims. Up to 4.1 million shares could theoretically be issued if claims are successful, causing dilution.
Investor Verification Checklist
- Customer Concentration: Verify the stability of contracts with Travelport Limited and Expedia, Inc., which together represent 30% of revenue.
- International Losses: Monitor the trajectory of European operating losses ($1.6M in 2006) against revenue growth to assess the timeline for profitability in new markets.
- Share Repurchase Impact: Confirm the effect of the 1 million share buyback on future earnings per share calculations and capital allocation strategy.
- Former Stockholder Liability: Review the status of the cash payment program for former stockholders to ensure the $10,000 recorded liability remains adequate and no new significant claims have emerged.
- Subscriber Acquisition Costs: Track the "Average Cost per Acquisition" metric in future quarters to ensure it does not rise disproportionately to revenue growth.