Travelzoo 2018 Q1 Form 10-Q Summary
Business Context and Reporting Period
Travelzoo provides travel, entertainment, and lifestyle deals through its website, mobile applications, email publications, Travelzoo Network, Local Deals, Getaway vouchers, and hotel-booking platform. Revenue is generated primarily from advertising fees and transaction-based commissions. The filing covers the three months ended March 31, 2018, with comparison to the three months ended March 31, 2017. Travelzoo operates through Asia Pacific, Europe, and North America segments and reported approximately 29.7 million members.
SuperSearch and Fly.com were discontinued in the first quarter of 2017. Accordingly, the prior-year results include $1.9 million of after-tax discontinued-operations income, primarily reflecting a $2.9 million gain on the sale of the Fly.com domain name.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $30.9 million | $28.4 million | +8.6% |
| Gross profit | $27.5 million | $25.2 million | +9.0% |
| Gross margin | 89.0% | 88.7% | +0.3 percentage points |
| Income from continuing operations | $2.5 million | $0.9 million | +191% |
| Continuing-operations margin | 8.1% | 3.0% | +5.1 percentage points |
| Net income | $2.5 million | $2.7 million | -8.8% |
| Diluted earnings per share | $0.20 | $0.21 | Prior year included discontinued operations |
| Net cash provided by operating activities | $179,000 | $555,000 | -$376,000 |
Operating expenses totaled $23.8 million, or 77.2% of revenue, compared with $23.2 million, or 81.4%, in the prior-year quarter. Sales and marketing expense was $15.5 million, product development was $2.5 million, and general and administrative expense was $5.8 million.
Cash and cash equivalents were $23.1 million at March 31, 2018, and total cash, cash equivalents, and restricted cash were $24.6 million. Current assets were $38.5 million versus current liabilities of $26.6 million. The balance sheet does not show debt borrowings. Accounts payable included $10.6 million of Local Deals and Getaway merchant payables.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by Travel revenue, which increased to $27.0 million from $24.5 million. Local revenue was essentially flat at $3.9 million.
- North America revenue increased to $18.6 million from $17.5 million, and operating profit rose to $3.4 million from $2.7 million.
- Europe revenue increased to $10.3 million from $9.1 million, while operating profit rose to $2.0 million from $949,000. Management attributed approximately $1.2 million of the revenue increase to favorable foreign-currency movements.
- Asia Pacific revenue increased to $2.0 million from $1.8 million, but the operating loss widened to $1.7 million from $1.5 million.
- Revenue recognition changed upon adoption of ASC 606 on January 1, 2018. The adoption produced a $1.3 million net increase to retained earnings, primarily from estimated recognition of revenue related to certain unredeemed vouchers. The reported quarterly impact was not material.
- Operating cash flow declined because of working-capital changes, including a $2.2 million reduction in accounts payable and accrued expenses and other.
- The prior-year quarter benefited from $2.9 million of proceeds from the Fly.com domain sale and $1.8 million of share repurchases; neither occurred in Q1 2018.
- Total reported members increased to 29.7 million from 29.1 million. Consolidated revenue per member increased to $4.20 from $3.91 on an annualized basis.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Travelzoo did not provide specific quantitative revenue or earnings guidance. Management expects cash on hand to fund working-capital and capital-expenditure needs for at least the next twelve months, while continuing to invest in marketing, product development, mobile offerings, hotel-booking capabilities, and international operations.
- Management expects fluctuations in revenue, cost of revenues, sales and marketing, product development, general and administrative expense, and the effective tax rate.
- Local Deals and Getaway remain exposed to competition, declining consumer demand for vouchers, refund claims, merchant performance, and potential voucher or gift-card regulation.
- Asia Pacific continues to generate operating losses, and further international expansion may increase marketing, staffing, and other costs.
- The hotel-booking platform and packaging technology require additional investment and may not generate sufficient incremental revenue. A shift toward commission-based hotel revenue may reduce reported revenue depending on booking volume.
- Mobile usage, search-engine algorithm changes, email deliverability, online advertising competition, technology disruptions, cybersecurity, payment processing, and data-privacy regulation could adversely affect operations.
- Foreign-currency movements affected reported results; the company does not hedge these exposures. A hypothetical 10% adverse currency movement was estimated to produce a $296,000 incremental foreign-exchange loss.
- The company has approximately $24.2 million of contractual commitments, including $23.1 million of operating leases and $1.1 million of purchase obligations.
- The company continues a voluntary program for certain former Travelzoo.com Corporation promotional shareholders. Future payments cannot be reliably estimated and depend partly on the company’s stock price and the number of valid claims.
- In April 2018, Travelzoo invested EUR 2.5 million for a 25% interest in WeekenGO, a German vacation-package technology company, and entered into a related marketing-services agreement.
- Tax accounting related to the Tax Cuts and Jobs Act remained provisional. The company estimated no significant GILTI impact and no net transition-tax expense, but future adjustments could materially affect income tax expense.
Most Important Facts for Investors to Verify
- Whether Travelzoo can sustain Travel revenue growth while Local revenue and voucher demand remain weak.
- Whether Asia Pacific can reduce its substantial operating loss and whether further international investment will improve returns.
- The conversion of reported net income into operating cash flow, particularly the effect of merchant payables and other working-capital movements.
- The ultimate financial impact of the ASC 606 adoption, estimated voucher breakage, refunds, and related merchant obligations.
- The economics, adoption, and required investment of the hotel-booking platform and packaging initiatives.
- Potential changes in tax liabilities, including Tax Act accounting, uncertain tax positions, foreign withholding taxes, and audits.
- The amount and timing of any future payments under the former promotional-shareholder program.
- The terms and financial impact of the WeekenGO investment and related advertising agreement.
- Concentration and control considerations: Azzurro Capital, controlled by the Ralph Bartel 2005 Trust, held approximately 57.5% of outstanding shares as of March 31, 2018.