Travelzoo Inc. 2016 Form 10-K Summary
Business Context and Reporting Period
Travelzoo is a global publisher of travel, entertainment and local offers. Revenue is generated primarily from advertising, listing, click-through, voucher, hotel-booking and search fees. The company operates through Asia Pacific, Europe and North America and reaches approximately 28.8 million email members.
This filing covers the fiscal year ended December 31, 2016. Fourth-quarter 2016 revenue was $29.3 million and net income was $0.9 million.
Financial Performance and Position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $128.6 million | $141.7 million | Down 9% |
| Gross profit | $114.2 million | $122.9 million | Down 7% |
| Gross margin | 88.9% | 86.7% | Up 2.2 points |
| Income from operations | $11.1 million | $7.1 million | Up 55% |
| Operating margin | 8.6% | 5.0% | Up 3.6 points |
| Net income | $6.6 million | $10.9 million | Down 39% |
| Net margin | 5.2% | 7.6% | Down 2.4 points |
| Diluted EPS | $0.47 | $0.74 | Down 36% |
| Operating cash flow | $8.7 million | $4.2 million | Up $4.5 million |
Revenue by category was $94.2 million from Travel, $14.3 million from Search and $20.1 million from Local. North America represented 62% of revenue, Europe 30% and Asia Pacific 8%.
Cash and cash equivalents were $26.8 million at year-end, compared with $35.1 million in 2015. Working capital was $14.6 million and stockholders’ equity was $18.1 million. The company stated that cash on hand should fund working-capital needs for at least the next twelve months.
The company had no outstanding related-party loan at year-end after repaying a $5.7 million note in January 2016. Contractual commitments totaled $27.5 million, consisting primarily of operating leases. The filing does not identify material bank debt at December 31, 2016.
Material Changes Versus Prior Period
- Revenue declined $13.2 million, primarily because of lower Travel, Search and Local revenue.
- Travel revenue declined 5% to $94.2 million, Search revenue declined 20% to $14.3 million, and Local revenue declined 19% to $20.1 million.
- Operating income improved despite lower revenue because cost of revenues fell $4.5 million, sales and marketing fell $8.0 million, product development fell $3.1 million and general and administrative expense fell $1.5 million.
- Operating losses in Asia Pacific increased to $3.9 million from $2.4 million. Europe generated $6.1 million of operating income, while North America generated $8.8 million.
- Operating cash flow improved, but financing activities used $15.3 million, primarily for $9.7 million of share repurchases and repayment of the related-party loan.
- The company repurchased 1.056 million shares for approximately $9.5 million during 2016, reducing year-end shares outstanding to approximately 13.5 million from 14.5 million.
- Net income was affected by the absence of the $8.4 million tax benefit recognized in 2015 related to the expiration of a statute of limitations on unexchanged promotional shares.
Guidance, Outlook, Risks and Unusual Items
The filing provides no quantitative revenue or earnings guidance. Management expects Search revenue to continue declining because of lower traffic-acquisition spending, search-engine competition and weak mobile monetization. Travelzoo was evaluating discontinuation of SuperSearch and discussing a possible sale of Fly.com.
Management is investing in mobile products, a hotel-booking platform, audience growth and selected international markets. These initiatives may increase costs and may not produce sufficient incremental revenue. Local Deals and Getaway face declining voucher demand, lower take rates and significant competition.
- The IRS proposed additional federal tax, penalties and state tax expense of approximately $31 million, excluding interest and possible state penalties, relating to the 2009 sale of the Asia Pacific business. Travelzoo disagrees and intends to contest the proposed adjustment.
- The company reported approximately $2.9 million of unrecognized tax benefits, including interest, and a $7.2 million valuation allowance against foreign net operating loss carryforwards.
- Foreign currency movements reduced reported European and Asia Pacific results. A hypothetical 10% adverse currency movement was estimated to produce an incremental $964,000 foreign-exchange loss.
- Key operating risks include dependence on online advertising, email distribution, search-engine algorithms, mobile adoption, advertiser retention, voucher refunds, privacy and data-security regulation, competition and international operations.
- Azzurro Capital, controlled by founder and director Ralph Bartel, held approximately 55.2% of outstanding shares, creating significant controlling-stockholder risk.
- The company’s disclosure controls and internal control over financial reporting were reported effective, and the independent auditor issued an unqualified opinion.
Important Facts for Investors to Verify
- Whether the IRS tax proposal could ultimately require a material cash payment; the filing does not provide a reliable estimate of the final outcome.
- The sustainability of operating-margin improvement after cost reductions, given continued revenue declines.
- Progress, economics and adoption of the hotel-booking platform and mobile products.
- The timing and financial consequences of any SuperSearch discontinuation or Fly.com sale.
- Cash availability for international operations and commitments; the filing presents differing amounts of cash held outside the United States in separate sections.
- Continued declines in Search and Local revenue, voucher demand, take rates and advertiser spending.
- The impact of share repurchases and the February 2017 authorization for up to an additional 1.0 million shares.