Travelzoo 10-Q Summary: Q1 2022
Business context and reporting period
Travelzoo is a global Internet media company providing travel, entertainment and lifestyle deals through digital publications, websites, applications and its Jack’s Flight Club subscription service. The filing covers the three months ended March 31, 2022, with comparative results for the three months ended March 31, 2021. Reportable segments are North America, Europe and Jack’s Flight Club. Asia Pacific remains classified as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $18.453 million | $14.284 million | +$4.169 million, approximately 29% |
| Gross profit | $15.621 million | $11.266 million | +$4.355 million |
| Gross margin | 84.7% | 78.9% | +5.8 percentage points |
| Operating income (loss) | $1.919 million | $(0.767) million | Improved by $2.686 million |
| Income from continuing operations | $2.374 million | $(1.675) million | Returned to profitability |
| Net income attributable to Travelzoo | $2.359 million | $(1.642) million | Returned to profitability |
| Diluted earnings per share | $0.19 | $(0.14) | Improved |
| Operating cash flow | $(6.764) million | $9.064 million | Decrease of $15.828 million |
Sales and marketing expense increased to $8.581 million from $6.790 million, primarily because of higher member acquisition and marketing costs. Product development expense declined to $453,000 from $683,000, while general and administrative expense was broadly stable at $4.668 million.
Other income was $1.423 million versus a $166,000 loss in the prior-year quarter. The increase primarily reflected approximately $1.2 million of German COVID-related government funding and a $195,000 gain from receipt of an escrow payment related to the WeGo sale.
Cash and cash equivalents were $35.617 million at March 31, 2022, down from $43.815 million at December 31, 2021. Cash, cash equivalents and restricted cash totaled $36.759 million. The company had no cash used in financing activities during the quarter and reported no outstanding PPP debt after forgiveness in 2021. Operating lease liabilities totaled $11.430 million.
Material changes versus the prior comparable period
- North America revenue increased to $11.696 million from $9.819 million, and segment operating profit increased to $1.718 million from $39,000.
- Europe revenue increased to $5.934 million from $3.578 million, and segment operating results improved to $178,000 of profit from a $696,000 loss.
- Jack’s Flight Club revenue declined to $823,000 from $887,000, but segment results improved to $23,000 of profit from a $110,000 loss.
- Travel revenue increased to $16.674 million from $12.291 million, led by higher Top 20 and Newsflash advertising, hotel commissions and European Getaways revenue. North American Getaways revenue declined.
- Local revenue declined to $956,000 from $1.106 million, primarily due to lower Local Deals voucher sales.
- Consolidated members declined to 27.46 million from 28.35 million. Revenue per member increased to $2.47 from $1.77, while average acquisition cost increased to $1.25 from $0.81.
- The company acquired Secret Escapes’ Spanish business unit and certain U.S. member assets in March 2022, recording approximately $2.0 million of intangible assets. The U.S. asset purchase involved Azzurro Capital, the largest shareholder’s affiliate, and had a $1.75 million purchase price.
Guidance, outlook, risks and unusual items
Management stated that revenue and net income increased from the prior year and prior quarter and expected both to continue increasing during the remainder of 2022 as travel conditions improved. The filing does not provide formal quantitative revenue or earnings guidance.
Liquidity remains a significant consideration. Merchant payables were $60.479 million, primarily related to unredeemed vouchers, and all were classified as current. This resulted in negative net working capital of approximately $20.8 million. Most vouchers expire in 2022, with the remainder primarily expiring in 2023, although expiration dates may be extended. Management believes projected redemption activity and available cash should support working capital needs for at least the next twelve months, but accelerated redemptions, weaker profitability or lower operating cash flow could require additional financing.
The company identified a potential going-concern concern arising from negative working capital and operating cash use, but concluded that cost management and potential equity or debt financing plans alleviate the concern. Management also noted that financing may not be available on acceptable terms, or at all.
Key risks include continued effects of COVID-19 on travel and hospitality advertisers, voucher refunds and merchant redemptions, advertiser concentration in travel-related industries, competition for digital advertising and members, foreign currency movements, uncertain tax positions, litigation and the inability to estimate the ultimate cost of the legacy Netsurfers shareholder payment program. Purchase commitments were approximately $2.3 million, and unrecognized tax benefits plus related interest and penalties totaled approximately $1.3 million.
Most important facts for investors to verify
- Whether the expected recovery in travel advertising and Getaways demand continues through the remainder of 2022.
- Actual voucher redemption, expiration and refund activity relative to the $60.5 million merchant payable balance and $3.8 million refund liability.
- Whether operating cash flow returns to positive levels after the $6.8 million use in Q1 2022.
- Availability and terms of any required equity, debt or other financing if redemptions accelerate or profitability weakens.
- The sustainability of Q1 earnings excluding the approximately $1.2 million German government grant and $195,000 WeGo escrow gain.
- Performance and integration of the newly acquired Secret Escapes member assets, including the related-party nature of the U.S. asset transaction.
- Future member growth, acquisition costs and monetization, particularly as consolidated membership declined while revenue per member increased.