Business Context and Reporting Period
Company: Travelzoo Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Travelzoo is a global Internet media company that aggregates and publishes travel and entertainment deals to over 18 million subscribers via websites, email newsletters (Top 20, Newsflash), and search tools (SuperSearch, Fly.com). Revenue is generated primarily through advertising fees from travel and entertainment companies.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Revenues | $93.97 million | $80.82 million |
| Net Income (Loss) | $5.19 million | ($4.12 million) |
| Income from Continuing Operations | $6.42 million | $5.91 million |
| Operating Margin | 14.6% | 16.5% |
| Cash and Cash Equivalents | $19.78 million | $14.18 million |
| Working Capital | $27.25 million | $17.64 million |
| Debt | $0 (No outstanding debt) | $0 |
| Basic EPS (Net Income) | $0.32 | ($0.29) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 16% year-over-year to $94.0 million. This was driven by a 70% increase in European revenues ($16.3 million) and a 9% increase in North American revenues ($78.0 million).
- Profitability: The company returned to profitability with a net income of $5.2 million, compared to a net loss of $4.1 million in 2008. This turnaround was significantly aided by a $4.4 million tax benefit related to the dissolution of the Asia Pacific business segment.
- Discontinued Operations: On October 31, 2009, the company sold its Asia Pacific operating segment to Azzurro Capital Inc. Results for this segment are classified as discontinued operations. The sale generated a $3.4 million gain (recorded in equity) and a $4.4 million tax benefit.
- Cost of Revenues: Increased to $5.6 million (6.0% of revenue) from $2.8 million (3.5% of revenue), primarily due to $1.5 million in fees related to the new Fly.com search engine.
- Operating Expenses: Sales and marketing expenses rose to $49.7 million, and general and administrative expenses rose to $24.9 million, reflecting continued investment in subscriber acquisition and international expansion.
Guidance, Outlook, and Risks
- Management Outlook: Management expects European operations to continue incurring losses in the next 12 months due to significant subscriber acquisition costs and the launch of Fly.com. They anticipate cash on hand ($19.8 million) is sufficient for working capital needs for at least the next 12 months.
- Strategic Focus: Growth strategy relies on international expansion (Europe), expanding product scope into entertainment, and building the Fly.com meta-search engine.
- Key Risks:
- Profitability: No assurance of future profitability; operating results may fluctuate significantly.
- Competition: Intense competition from portals (Yahoo!, MSN), search engines (Google), and online travel agencies (Expedia, Priceline).
- Customer Concentration: While no single client exceeded 10% of revenue in 2009, the online travel agency industry is highly concentrated, posing a risk of future concentration.
- Legal/Contingencies: Potential claims from former stockholders of Travelzoo.com Corporation regarding unissued shares (up to 4.07 million shares) and an ongoing IRS examination regarding tax deductions for cash payments to former stockholders.
- Management Transition: Christopher Loughlin is scheduled to replace Holger Bartel as CEO on July 1, 2010.
Investor Verification Checklist
- European Losses: Verify the sustainability of the 70% revenue growth in Europe against the continued operating losses in that segment.
- Fly.com Economics: Assess the long-term profitability of Fly.com, given the significant increase in cost of revenues ($1.5 million in search fees) associated with its launch.
- Discontinued Operations Impact: Confirm that the $4.4 million tax benefit from the Asia Pacific sale is a one-time item and not indicative of recurring tax efficiency.
- Customer Concentration: Monitor if any single client approaches or exceeds the 10% revenue threshold, given the high concentration in the online travel agency industry.
- Legal Contingencies: Review the status of the IRS examination regarding 2005-2006 tax deductions and the potential liability for unissued shares to former stockholders.