Travelzoo Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012. Travelzoo is a global Internet media company generating primarily advertising revenue from travel, search, local deals and Getaways products. Reportable segments are North America and Europe. The filing was dated October 25, 2012.
Financial Highlights
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $35.4 million | $38.7 million | $114.1 million | $113.2 million |
| Gross profit | $31.5 million | $34.4 million | $102.5 million | $103.6 million |
| Income from operations | $4.2 million | $9.2 million | $21.1 million | $6.8 million |
| Net income (loss) | $3.4 million | $5.9 million | $14.4 million | $(3.1) million |
| Diluted EPS | $0.22 | $0.36 | $0.90 | $(0.19) |
| Operating cash flow | Not separately provided | Not separately provided | $23.7 million | $8.6 million |
- Margins: Q3 gross margin was 88.7%, operating margin was 11.8% and net margin was 9.7%. Nine-month margins were 89.8%, 18.6% and 12.7%, respectively.
- Liquidity: Cash and cash equivalents were $57.6 million at September 30, 2012, compared with $38.7 million at December 31, 2011. Restricted cash was $3.1 million.
- Debt: The company reported no outstanding debt and no derivative transactions.
- Balance sheet: Total assets were $96.6 million and total stockholders’ equity was $47.2 million. Current liabilities were $38.7 million, including $19.3 million of Local Deals and Getaways merchant payables.
- Cash flow: Nine-month operating cash flow was $23.7 million; investing cash use was $2.0 million, primarily for property and equipment; financing cash use was $3.6 million for stock repurchases. Cash increased by $18.9 million during the period.
Material Changes Versus Prior Comparable Period
- Q3 revenue declined 8.3%, while nine-month revenue increased 0.8% year over year.
- Q3 operating income declined 54.5%, primarily because revenue decreased while general and administrative expense and sales and marketing expense increased.
- Nine-month operating income increased substantially because the prior-year period included a $20.0 million Delaware settlement charge for unclaimed promotional merger shares; 2012 included a $3.0 million charge for a related contingency.
- Q3 North America revenue declined $2.8 million, mainly from lower Search and Local revenue. North America operating margin fell to 12.3% from 27.8%.
- Q3 Europe revenue declined $0.4 million and operating margin fell to 10.4% from 13.2%. For the nine-month period, Europe revenue increased $1.6 million and operating income increased to $6.0 million from $3.2 million.
- Consolidated Search revenue declined to $6.8 million in Q3 from $8.7 million, while Local revenue declined to $8.7 million from $9.9 million. Nine-month Local revenue increased to $28.0 million from $25.2 million.
- Subscriber count increased to 22.4 million from 21.3 million, but homepage page views declined to 10.8 million from 14.3 million. Average subscriber acquisition cost increased to $2.60 from $1.43.
- Cost of revenues increased as a percentage of revenue to 11.3% in Q3 from 10.9% and to 10.2% for nine months from 8.5%, reflecting voucher-related refunds, credit card fees, customer service costs and third-party partner payments.
- In July 2012, the company authorized repurchases of up to 1.0 million shares. It repurchased 161,000 shares for $3.6 million during the quarter, leaving 839,000 shares authorized for repurchase.
Outlook, Commentary, Risks and Unusual Items
- Management expected incremental sales and marketing spending of approximately $3 million to $4 million per quarter for several quarters. Q3 included $1.2 million of incremental subscriber marketing expense compared with Q2.
- Management stated that cash on hand was expected to fund working capital needs for at least the next 12 months, while noting that expansion, product development and adverse business developments could increase capital requirements.
- Travelzoo planned to invest in or develop hotel-booking-platform capabilities and a commission-based hotel offering. Management cautioned that development costs and the new cost structure could exceed incremental revenue.
- Key operating risks include intense competition, reduced advertiser spending, weaker traffic and page views, subscriber acquisition costs, voucher refund and merchant-performance risk, economic weakness in Europe, foreign-currency fluctuations and dependence on email distribution and Internet infrastructure.
- The company faced state unclaimed-property reviews relating to unexchanged promotional merger shares. If all additional claims were upheld, the potential cost was estimated at approximately $23.2 million above the amount accrued, plus possible interest and penalties. The ultimate exposure was not estimable.
- Pending legal matters included securities class actions, shareholder derivative actions, a challenge to the sale of the Asia Pacific division, and a patent infringement action involving Fly.com. Potential losses were not estimable.
- The company reported approximately $9.3 million of unrecognized tax benefits and $9.9 million of long-term tax liabilities. Tax audits and uncertain tax positions could affect future cash payments and tax expense.
- Operating lease and purchase commitments totaled approximately $16.3 million as of September 30, 2012.
- Foreign-currency sensitivity analysis indicated that a hypothetical 10% adverse currency movement would have produced an incremental foreign-exchange loss of approximately $90,000 for the nine-month period.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2012, with no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify whether increased marketing spending produces sustainable revenue and subscriber engagement growth, particularly given lower page views and higher acquisition costs.
- Assess the durability and profitability of Local Deals, Getaways, Search and the planned hotel-booking platform, including voucher refunds and merchant liabilities.
- Monitor the state unclaimed-property reviews and potential exposure exceeding the recorded accrual.
- Review the status and potential financial impact of the securities, derivative, Asia Pacific transaction and Fly.com patent litigation.
- Evaluate the company’s $57.6 million cash balance after considering $22.0 million held outside the United States, restricted cash, merchant payables, tax liabilities and contractual commitments.
- Consider governance and related-party risks, including Ralph Bartel’s approximately 53.8% beneficial ownership and the company’s historical transactions with related parties.