Travelzoo Inc. Form 10-Q Summary
Business Context and Reporting Period
Travelzoo is a global media commerce company generating primarily advertising and commission revenue from travel, search, local deals, vouchers and hotel-booking products. It reported unaudited results for the three months ended March 31, 2016, with comparative results for the three months ended March 31, 2015. Operations are managed across Asia Pacific, Europe and North America. The financial statements retrospectively include the Asia Pacific business acquired from related party Azzurro Capital in August 2015.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $34.8 million | $39.1 million | Down 11.1% |
| Gross profit | $30.8 million | $34.6 million | Down 11.0% |
| Gross margin | 88.5% | 88.4% | Up 0.1 percentage points |
| Income from operations | $3.1 million | $3.0 million | Up 5.6% |
| Operating margin | 9.0% | 7.6% | Up 1.4 percentage points |
| Net income | $2.0 million | $0.7 million | Up $1.3 million |
| Net margin | 5.9% | 1.9% | Up 4.0 percentage points |
| Diluted EPS | $0.14 | $0.05 | Up $0.09 |
| Operating cash flow | $1.4 million | $1.3 million | Up $0.1 million |
Cash and cash equivalents were $28.8 million at March 31, 2016, compared with $35.1 million at December 31, 2015. The company had $1.2 million of restricted cash. Accounts receivable were $17.4 million and accounts payable were $22.1 million, including $16.2 million of Local Deals and Getaways merchant payables.
There was no related-party note payable at March 31, 2016; the company paid off the $5.7 million Asia Pacific acquisition note in January 2016. Net cash used in financing activities was $7.5 million, primarily reflecting the note repayment and $1.9 million of stock repurchases. Capital expenditures were $145,000.
Material Changes Versus the Prior Comparable Period
- Revenue declined $4.3 million, primarily from lower North American revenue, which fell $3.3 million. Consolidated Travel revenue declined $2.0 million, Search revenue declined $1.4 million and Local revenue declined $1.0 million.
- North America revenue decreased 13.2%, while operating income was approximately unchanged at $2.1 million because expenses declined by approximately $3.3 million.
- Europe revenue decreased 5.8%, but operating income increased to $2.1 million from $1.7 million, aided by lower expenses and improved operating margin of 19.2% versus 15.0%.
- Asia Pacific revenue declined 14.6% and the operating loss widened to $1.0 million from $0.8 million. Asia Pacific remained unprofitable, with a negative operating margin of 46.2%.
- Sales and marketing expense declined $3.1 million, product development expense declined $0.2 million and general and administrative expense declined $0.6 million, primarily due in part to lower headcount and reduced traffic-acquisition spending.
- The effective tax rate fell to 38% from 71%, primarily because Q1 2015 included a $565,000 expense for unrecognized state tax benefits and because of changes in the geographic mix of taxable income.
- Foreign currency translation produced a $192,000 comprehensive-income benefit in Q1 2016, compared with a $2.1 million loss in Q1 2015.
- The company repurchased 246,000 shares for approximately $2.0 million and had authorization to repurchase 810,000 additional shares at March 31, 2016.
Guidance, Outlook, Commentary and Risks
- Management stated that cash on hand should be sufficient for working-capital needs for at least the next twelve months. Of the $28.8 million cash balance, $15.7 million was held outside the United States and could be subject to additional U.S. taxes if distributed domestically.
- No specific revenue or earnings guidance was provided. Management expects continued investment in member acquisition, mobile offerings, social media, product development and the hotel-booking platform, with potentially significant quarter-to-quarter expense fluctuations.
- Management expects Search revenue to decline because of lower traffic acquisition, search-engine competition and weak mobile monetization. Local revenue may also continue to decline because of competition, lower voucher demand and lower take rates.
- The company received an IRS Revenue Agent’s Report proposing approximately $31 million of additional federal tax, penalties and state tax expense, excluding interest and possible state penalties, related primarily to the IRS valuation of assets sold in the 2009 Asia Pacific transaction. Travelzoo disagrees and intends to contest the proposed adjustment. No additional liability was recorded for this matter.
- Unrecognized tax benefits were approximately $2.1 million, with accrued interest and penalties of approximately $879,000. The total contingency for unrecognized tax benefits including interest was approximately $3.0 million.
- Operating lease and purchase commitments totaled $28.9 million as of March 31, 2016, including $26.6 million of operating leases.
- The voluntary cash program for former Travelzoo.com Corporation promotional shareholders remains open. Future payments cannot be reliably estimated and depend partly on the company’s stock price and the number of valid claims.
- Principal business risks include dependence on online advertising and email engagement, mobile migration, search-engine algorithm and traffic-acquisition changes, competition, declining voucher demand, merchant refunds, foreign exchange movements, international operations, cybersecurity and regulatory exposure.
- Azzurro Capital, controlled by the founder’s family trust, held approximately 52.1% of outstanding shares, creating significant controlling-stockholder influence and related-party transaction considerations.
Most Important Facts to Verify
- Progress and potential financial exposure from the IRS tax assessment of approximately $31 million, including interest and penalties.
- Whether revenue declines in Travel, Search and Local stabilize, particularly in North America and Asia Pacific.
- Whether cost reductions can offset declining revenue without impairing member growth, product development or long-term competitiveness.
- Performance and required investment of the Asia Pacific business and hotel-booking platform.
- Cash availability by jurisdiction, cash-repatriation taxes and the effect of continued share repurchases on liquidity.
- Trends in voucher refunds, merchant payables, unredeemed vouchers and the unresolved promotional-share cash program.
- Future tax-rate volatility, foreign-exchange effects and the outcome of ongoing tax examinations.