Travelzoo Inc. 2014 Q1 Form 10-Q Summary
Business Context and Reporting Period
Travelzoo is a global Internet media company generating primarily advertising fees from travel, search, local deals and getaway products. The company reported unaudited results for the three months ended March 31, 2014, with North America and Europe as reportable segments. Asia Pacific operations are licensed to related Azzurro entities and are not owned by Travelzoo.
Financial Performance and Liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $40.2 million | $42.2 million | Down 4.7% |
| Gross profit | $35.4 million | $38.2 million | Down 7.3% |
| Gross margin | 88.1% | 90.6% | Down 250 bps |
| Income from operations | $7.0 million | $8.0 million | Down 12.9% |
| Operating margin | 17.4% | 19.1% | Down 170 bps |
| Net income | $4.6 million | $5.6 million | Down 17.1% |
| Net margin | 11.5% | 13.3% | Down 180 bps |
| Diluted EPS | $0.31 | $0.36 | Down $0.05 |
| Cash flow from operations | $1.8 million | $6.5 million | Down 73.1% |
Cash and cash equivalents were $61.0 million at March 31, 2014, down from $66.2 million at December 31, 2013. The company had no outstanding debt and stated that cash on hand should fund working capital needs for at least the next 12 months. Approximately $40.2 million of cash was held outside the United States. Restricted cash totaled $1.5 million.
Investing cash outflows were $0.8 million, primarily for $1.0 million of property and equipment purchases. Financing cash outflows were $6.0 million, including $5.6 million used to repurchase 244,000 shares and $0.5 million related to the reverse/forward stock split. Operating cash flow was reduced by working-capital uses, including payments and accrual changes associated with unexchanged promotional shares.
Material Changes Versus the Prior Comparable Period
- North America revenue declined $3.6 million, primarily from a $1.8 million reduction in Search revenue and a $1.4 million reduction in Local revenue.
- Europe revenue increased $1.6 million, led by a $1.9 million increase in Travel revenue, partially offset by lower Local revenue.
- Consolidated Travel revenue increased $1.6 million to $28.4 million, while Search revenue fell $1.7 million to $4.8 million and Local revenue fell $1.9 million to $6.9 million.
- Cost of revenues increased, reducing gross margin. The filing attributes the increase primarily to higher third-party network partner payments and Local Deals and Getaways costs, including subscriber refunds.
- Sales and marketing expense decreased $1.9 million, principally because of a planned $1.5 million reduction in Search traffic-acquisition costs.
- General and administrative expense was broadly stable at $10.6 million, as higher compensation and headcount costs were substantially offset by lower professional fees.
- Subscribers increased to 23.6 million from 22.9 million, but consolidated revenue per subscriber declined to $7.16 from $7.51 and revenue per employee increased to $362,000 from $348,000.
- The effective tax rate increased to approximately 35% from 31%, primarily because European net operating losses had been fully utilized.
Guidance, Outlook, Commentary and Risks
- Management expected Search revenue to decline by up to $2.0 million in the quarter ending June 30, 2014 versus the comparable 2013 quarter because of reduced traffic-acquisition spending and competitive conditions.
- The company expected incremental hotel-booking-platform costs exceeding $400,000 in the quarter ending June 30, 2014.
- Management anticipated continued investment in subscribers, mobile products, social media, analytics, international operations and the hotel-booking platform, with potential fluctuations in sales and marketing and general and administrative expenses.
- Key operating risks include search-engine algorithm changes, mobile monetization challenges, intense competition, declining Local and Search demand, voucher refund exposure, dependence on advertisers and email distribution, foreign-exchange movements, and economic weakness affecting travel advertising.
- Unclaimed-property claims involving approximately 400,000 additional promotional shares remain possible. The company recorded reserves for estimated remaining claims but stated that total exposure depends on state interpretations, penalties and interest. It paid $1.2 million to settled states during the quarter and retained an $11.5 million reserve for unexchanged promotional shares at March 31, 2014.
- A Fly.com patent-infringement lawsuit remains pending; the company considers it without merit, but cannot estimate potential loss. A separate shareholder derivative action was dismissed with prejudice in January 2014 and was not appealed.
- The company had approximately $9.3 million of unrecognized tax benefits, $1.2 million of accrued interest and penalties related to uncertain tax positions, and ongoing federal and other tax examinations. The filing does not provide a clear estimate of potential additional tax payments.
- Operating lease commitments totaled $31.8 million, and total disclosed commitments, including purchase obligations, were $33.2 million.
Most Important Facts to Verify
- Whether Search revenue continues to decline at or below management’s stated expectation and whether the hotel-booking platform generates sufficient revenue to offset development and operating costs.
- The adequacy of reserves for remaining unclaimed-property claims and payments to former promotional shareholders.
- The sustainability of operating cash flow, which fell materially despite continued profitability.
- The effect of lower Local voucher volumes, refund rates and merchant economics on future margins and liquidity.
- The outcome and potential cost of the Fly.com patent litigation and pending tax examinations.
- The concentration of control: Azzurro held approximately 49.0% of outstanding shares and, through a proxy, approximately 50.4% of voting power.
- The financial statement reports cost of revenues of $4.8 million, while the MD&A discussion refers to approximately $4.3 million; investors should reconcile this presentation difference.