Travelzoo Inc. Form 10-Q Summary
Business Context and Reporting Period
Travelzoo is a global Internet media company serving more than 23 million subscribers and millions of website users. Its primary revenue source is advertising, supplemented by commissions from Local Deals vouchers. Reported operations consist of North America and Europe; the Asia Pacific business was sold in 2009 and operates under license agreements. This filing covers the three and six months ended June 30, 2011, compared with the same periods in 2010.
As of June 30, 2011, Travelzoo had 343 employees, 16.5 million common shares outstanding, and was controlled by Ralph Bartel, who beneficially owned approximately 51.6% of the shares.
Key Financial Metrics
| Metric | Q2 2011 | Q2 2010 | Six Months 2011 | Six Months 2010 |
|---|---|---|---|---|
| Revenue | $37.6 million | $28.1 million | $74.5 million | $56.6 million |
| Gross profit | $35.1 million | $26.5 million | $69.6 million | $53.4 million |
| Gross margin | 93.3% | 94.3% | 93.4% | 94.2% |
| Income from operations | $7.6 million | $5.9 million | $(2.4) million | $11.1 million |
| Operating margin | 20.3% | 21.2% | (3.2)% | 19.6% |
| Net income (loss) | $4.9 million | $3.2 million | $(9.0) million | $5.7 million |
| Diluted EPS | $0.30 | $0.20 | $(0.55) | $0.35 |
- Revenue increased 34% year over year in Q2 and 32% for the six-month period.
- North America generated Q2 revenue of $27.7 million and operating income of $6.5 million. Europe generated revenue of $10.0 million and operating income of $1.1 million, compared with a $0.8 million operating loss in Q2 2010.
- Sales and marketing expense increased to $19.1 million in Q2 and $35.3 million for the six-month period, driven primarily by higher headcount, television advertising, and website traffic acquisition costs.
- General and administrative expense increased to $8.3 million in Q2 and $16.7 million for the six-month period.
- Cash used in operating activities was $0.6 million for the six months ended June 30, 2011, compared with $12.0 million of cash provided in the prior-year period. Capital expenditures were $1.1 million.
- Cash and cash equivalents totaled $40.1 million at June 30, 2011, compared with $41.2 million at December 31, 2010. Restricted cash was $3.1 million.
- The company reported no outstanding debt and no derivative instruments. Management stated that existing cash should fund working-capital needs for at least the next 12 months.
- Total assets were $70.8 million and stockholders’ equity was $37.7 million at June 30, 2011. Current liabilities were $30.8 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was broad-based: North America increased 25% in Q2 and 24% for the six-month period; Europe increased 67% in Q2 and 60% for the six-month period.
- Europe moved from operating losses of $0.8 million in Q2 2010 and $1.8 million for the first six months of 2010 to operating profits of $1.1 million and $1.8 million, respectively.
- North American operating margin declined to 23.6% in Q2 from 30.4%, primarily because of increased marketing and other operating costs. The six-month margin was relatively stable at 28.6% versus 28.8%.
- Gross margin declined modestly as cost of revenues increased to 6.7% of revenue in Q2 from 5.7%, and to 6.6% for the six-month period from 5.8%.
- Subscriber growth remained strong. At June 30, 2011, North American Top 20 subscribers increased 8% year over year and European Top 20 subscribers increased 27%. European homepage page views increased 36%, while North American page views declined 1%.
- Average cost per acquired subscriber in Q2 2011 was $1.16 in North America and $2.26 in Europe, compared with $1.62 and $4.31, respectively, in Q2 2010. Management cautioned that quarterly changes may not represent a long-term trend.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The $20.0 million cash settlement paid to Delaware on April 27, 2011 resolved claims relating to unclaimed shares from the former Travelzoo.com Corporation. The payment was recorded as a non-recurring operating expense in the first quarter and produced a significant decline in six-month operating income, net income, and cash flow.
- The settlement was treated as having no recognizable tax benefit. The six-month effective tax rate was negative 297%, compared with 48% in the prior-year period.
- Travelzoo continues a cash-payment program for former stockholders who establish valid claims. The company recorded $77,000 of expense in Q2 and $100,000 for the first six months. The total future cost is not reliably estimable and depends on valid claims and the company’s stock price; approximately 1.0 million potentially claimable shares had not been claimed as of June 30, 2011, assuming all historical requests were valid.
- Management expects headcount, sales and marketing expense, and general and administrative expense to continue increasing as the company expands internationally and develops products such as Local Deals and Fly.com. No formal revenue or earnings guidance is provided in the filing.
- Future operating performance depends on advertising rates, subscriber and website reach, client demand, new products, merchant participation, and the ability to compete in online advertising and local-deals markets.
- Operating lease and purchase commitments totaled $12.4 million, including $10.6 million of future operating lease payments and $1.8 million of purchase obligations.
- Unrecognized tax benefits were approximately $1.5 million, with uncertain settlement timing. The company is subject to tax examinations in U.S. federal, state, and foreign jurisdictions.
- Key risks include intense competition, dependence on online advertising and travel-related demand, international and foreign-currency exposure, subscriber acquisition costs, technology outages and security attacks, payment-processing and voucher regulation, legal and intellectual-property claims, and dependence on key personnel.
- A hypothetical 10% adverse foreign-currency movement would have resulted in an estimated incremental foreign-exchange loss of approximately $90,000 for the six-month period. The company does not hedge this exposure.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2011 and reported no material change in internal control over financial reporting during the quarter.
Most Important Facts to Verify
- Whether revenue growth, particularly from Local Deals and Europe, continues to offset rising marketing, personnel, and infrastructure costs.
- The sustainability of the improved profitability in Europe and the effect of currency movements on reported results.
- The cash-flow impact of the Delaware settlement and whether operating cash generation normalizes after the unusual payment.
- The ultimate cost and timing of payments to former Travelzoo.com Corporation stockholders and any additional escheat claims.
- Subscriber retention, website traffic, advertising-rate increases, and customer acquisition costs by region.
- Liquidity after considering $12.4 million of contractual commitments, potential tax settlements, continued expansion spending, and any future financing needs.
- Exposure to voucher-related regulations, payment-processing obligations, cybersecurity incidents, service outages, and competitive pressure from major online platforms and local-deals providers.