Travelzoo Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Travelzoo is a global publisher of travel, entertainment and local offers, generating revenue primarily from advertising fees, voucher transactions and hotel bookings. The filing covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. The company reported approximately 29.1 million members and operates across Asia Pacific, Europe and North America.
During the quarter, Travelzoo discontinued its SuperSearch and Fly.com search products to focus on the global Travelzoo brand. The Fly.com domain was sold on March 31, 2017.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $28.4 million | $30.8 million | Down 7.8% |
| Gross profit | $25.2 million | $27.0 million | Down 6.5% |
| Gross margin | 88.7% | 87.5% | Up 1.2 percentage points |
| Income from continuing operations | $0.9 million | $1.8 million | Down 52.9% |
| Continuing-operations margin | 3.0% | 5.9% | Down 2.9 percentage points |
| Net income | $2.7 million | $2.0 million | Up 33.9% |
| Net margin | 9.7% | 6.7% | Up 3.0 percentage points |
| Basic and diluted EPS | $0.21 | $0.14 | Up $0.07 |
| Operating cash flow | $0.6 million | $1.4 million | Down $0.9 million |
Cost of revenues declined to $3.2 million from $3.9 million, while operating expenses declined to $23.2 million from $24.1 million. Sales and marketing expense was $15.4 million, product development expense was $2.4 million and general and administrative expense was $5.4 million.
Net income included $1.9 million of after-tax income from discontinued operations. This included a $2.9 million gain on the sale of the Fly.com domain name, partially offset by operating expenses and taxes. Continuing operations therefore provide a more relevant measure of underlying performance.
Revenue and segment performance
| Segment | Q1 2017 revenue | Q1 2016 revenue | Q1 2017 operating income/(loss) |
|---|---|---|---|
| Asia Pacific | $1.8 million | $2.3 million | $(1.5) million |
| Europe | $9.1 million | $10.6 million | $0.9 million |
| North America | $17.5 million | $18.0 million | $2.7 million |
Travel revenue declined to $24.5 million from $25.8 million, while Local revenue declined to $3.9 million from $5.0 million. Local revenue decreased in all three geographic segments, primarily because of fewer Local Deals vouchers sold. Europe was also adversely affected by approximately $0.9 million of foreign currency impact. North America remained profitable and improved its operating margin to 15.1% from 11.0%, while Asia Pacific’s operating loss widened.
Cash, liquidity and capital structure
- Cash and cash equivalents were $28.6 million at March 31, 2017, compared with $26.8 million at December 31, 2016.
- Restricted cash was $1.4 million; total assets were $54.2 million.
- Current assets were $44.6 million versus current liabilities of $29.5 million, implying current coverage of approximately 1.5 times.
- The filing does not show outstanding bank debt. The related-party loan that required a $5.7 million repayment in Q1 2016 was not repaid in Q1 2017.
- Operating cash flow was $0.6 million. Investing cash flow was $2.8 million, primarily from the $2.9 million Fly.com domain sale. Financing cash outflow was $1.8 million, primarily from share repurchases.
- Travelzoo repurchased 215,080 shares for approximately $2.0 million during the quarter, with 784,920 shares remaining under the February 2017 authorization.
- Management stated that cash on hand is expected to fund working capital needs for at least the next twelve months.
Material changes versus the prior comparable period
- Revenue fell 7.8%, led by lower Local revenue and reduced revenue in Asia Pacific and Europe.
- Gross margin improved because cost of revenues declined faster than revenue.
- Continuing-operations income declined substantially, and continuing-operations margin fell to 3.0%, despite lower operating expenses.
- Reported net income increased because of the discontinued-operations gain on the Fly.com domain sale.
- Operating cash flow declined, partly because the prior-period working-capital movements were more favorable and the current period included a noncash $2.9 million disposal gain.
- Membership increased to 29.1 million from 28.7 million, but consolidated revenue per member declined to $3.91 from $4.29 on an annualized basis.
- The effective tax rate increased to 58% from 38%, primarily because of changes in the geographic mix of taxable income.
Outlook, commentary, risks and unusual items
Travelzoo provided no specific quantitative revenue or earnings guidance. Management expects continued investment in marketing, product development, mobile offerings and the hotel booking platform, with quarterly fluctuations in expenses and profitability. The company expects Local revenue may continue to decline because of competition and weaker consumer demand for vouchers. It also expects a shift from existing hotel revenue toward commission-based hotel revenue, which could reduce reported revenue depending on booking volume.
- The IRS Revenue Agent’s Report concerning the 2009 sale of the Asia Pacific business proposes approximately $31.0 million of additional federal tax, federal penalties and state tax, excluding interest and possible state penalties. Travelzoo disputes the proposed adjustment and intends to contest it.
- Unrecognized tax benefits were approximately $1.9 million, with accrued interest and penalties of approximately $1.0 million. The filing describes total tax contingencies including interest of approximately $2.9 million.
- Contractual commitments totaled $27.0 million, consisting of $26.0 million of operating leases and $1.0 million of purchase obligations.
- Future results remain exposed to foreign currency movements, competition, mobile-platform shifts, advertiser retention, voucher refunds, hotel-platform execution, online traffic costs and changing Internet, privacy and tax regulations.
- Azzurro Capital, associated with founder and director Ralph Bartel, held approximately 56.1% of outstanding shares, creating controlling-stockholder risk.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Separate recurring performance from the $2.9 million Fly.com domain-sale gain and discontinued operations.
- Monitor whether Local revenue and voucher volumes continue to decline and whether hotel-platform revenue offsets that decline.
- Assess the sustainability of North America profitability and the path to reducing Asia Pacific operating losses.
- Track the IRS tax dispute and potential exposure of approximately $31.0 million, excluding interest and penalties.
- Verify cash generation excluding one-time disposal proceeds and the effect of ongoing share repurchases.
- Evaluate the impact of the 58% effective tax rate, foreign cash holdings of approximately $10.8 million and potential repatriation taxes.
- Review the company’s $27.0 million contractual commitments, voucher-refund exposure and unresolved Netsurfer promotional-share claims.