Travelzoo 10-Q Summary
Business Context and Reporting Period
Travelzoo is a global Internet media company serving approximately 30 million members through travel, local-deal and lifestyle offerings, including its website, email products, mobile applications, Travelzoo Network and Jack’s Flight Club. The report covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Reportable segments are Travelzoo North America, Travelzoo Europe, Jack’s Flight Club and New Initiatives, which includes licensing and the developing Travelzoo META business. Asia Pacific operations remain classified as discontinued operations.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $21.6 million | $18.5 million | Up 17.1% |
| Gross profit | $18.9 million | $15.6 million | Up 21.1% |
| Gross margin | 87.5% | 84.7% | Up 2.8 percentage points |
| Operating income | $4.7 million | $1.9 million | Up 145.5% |
| Operating margin | 21.8% | 10.4% | Up 11.4 percentage points |
| Net income attributable to Travelzoo | $3.7 million | $2.4 million | Up 55.7% |
| Diluted earnings per share | $0.23 | $0.19 | Up $0.04 |
| Cash flow from operations | $0.5 million | $(6.8) million | Improved by $7.3 million |
Other income was $350,000, compared with $1.4 million in the prior-year quarter. The prior-year amount included approximately $1.2 million of German COVID-related government funding. The effective tax rate was 27%, compared with 29%.
Cash, cash equivalents and restricted cash totaled $19.8 million at March 31, 2023, including $19.1 million of cash and cash equivalents and $679,000 of restricted cash. Cash and cash equivalents included $10.6 million held outside the United States. The filing does not report traditional borrowings or funded debt; operating lease liabilities totaled $10.6 million.
Current assets were $36.0 million and current liabilities were $42.0 million, resulting in negative working capital of approximately $6.0 million, primarily because $28.0 million of merchant payables related to unredeemed vouchers were classified as current.
Material Changes Versus the Prior Comparable Period
- North America revenue increased $3.1 million to $14.8 million, primarily from higher Top 20 and Newsflash advertising, hotel commissions and Getaways revenue. Segment operating profit increased to $4.5 million from $1.8 million.
- Europe revenue declined slightly to $5.9 million, including an approximately $373,000 negative foreign-currency impact. Segment operating profit increased to $457,000 from $178,000.
- Jack’s Flight Club revenue increased $125,000 to $948,000 as premium membership increased to approximately 2.0 million, but the segment shifted to a $45,000 operating loss from $23,000 of operating profit due primarily to higher advertising and marketing expense.
- New Initiatives revenue remained immaterial at $8,000, while its operating loss increased to $217,000 from $102,000 as Travelzoo invested in Travelzoo META and related scouting activities.
- Sales and marketing expense increased $715,000, including a $660,000 increase in member-acquisition costs. General and administrative expense declined $255,000, primarily from lower salary, headcount and stock-based compensation costs.
- Operating cash flow improved to $535,000 from an outflow of $6.8 million, largely because the prior-year period reflected a larger reduction in merchant payables. Merchant payables decreased $4.6 million during Q1 2023.
- The company repurchased 34,687 shares for $186,000 during the quarter, leaving 658,938 shares authorized for repurchase under the program.
Guidance, Outlook, Risks and Unusual Items
Management expects 2023 revenue and net income to increase, based on improving travel conditions. Management also expects cash on hand at March 31, 2023 to fund working-capital needs for at least the next twelve months, but acknowledges that accelerated voucher redemptions, weaker profitability or lower operating cash flow could require additional financing.
Unredeemed vouchers expire from April 2023 through December 2025, with the majority expiring in 2023. Merchant payables are generally due upon redemption. The company had approximately $7.0 million of unredeemed vouchers representing its earned commissions and recorded an estimated refund liability of $785,000.
Key risks include dependence on travel and online advertising demand, competition, member-acquisition costs, voucher refund and redemption estimates, foreign-currency movements, cybersecurity and technology risks, and the potential resurgence of pandemic-related disruption. The company also has approximately $16.9 million of unrecognized tax benefits, plus approximately $746,000 of accrued interest and penalties.
Travelzoo acquired Metaverse Travel Experiences from related-party Azzurro Capital in December 2022 in connection with Travelzoo META. The transaction included issuance of approximately 3.4 million shares, $1.0 million of cash and a $4.8 million shareholder promissory note due June 30, 2023 with 12% accrued interest. Azzurro and Ralph Bartel together held approximately 50.5% of outstanding shares at March 31, 2023.
Management reported that disclosure controls were effective, but the company continues to remediate a previously reported material weakness in internal control over financial reporting related to accounting for non-routine, unusual or complex transactions.
Legal contingency accruals were not material, and management considers the likelihood of a materially adverse outcome from pending claims remote. The company has approximately $1.0 million of supplier purchase commitments and ongoing operating lease obligations.
Important Facts for Investors to Verify
- Whether voucher redemptions and refunds accelerate as the large 2023 expiration cohort becomes due, and the resulting effect on liquidity.
- Repayment of the $4.8 million related-party promissory note due June 30, 2023 and the treatment of accrued interest.
- Whether Travelzoo META produces material revenue relative to its operating costs.
- Sustainability of North America’s improved operating margin and the effect of rising member-acquisition costs.
- Progress toward remediation of the material weakness in internal control over financial reporting.
- Utilization and collectability of the $9.5 million tax indemnification asset and the company’s ability to use acquired net operating losses.
- Availability and terms of any additional financing if operating cash flow or voucher-redemption patterns deteriorate.