Travelzoo 10-Q Summary: Second Quarter 2020
Business context and reporting period
Travelzoo is a global Internet media company serving approximately 30 million members through travel, local-deal and lifestyle publications, websites, applications and email products. Revenue is generated primarily from advertising fees, voucher-related transactions and, beginning January 2020, subscriptions from Jack’s Flight Club.
This unaudited Form 10-Q covers the three and six months ended June 30, 2020. Results were materially affected by the COVID-19 pandemic, which reduced travel and local advertising, increased cancellations and refunds, and caused many advertising partners to pause or cancel spending.
Travelzoo exited its loss-making Asia Pacific business in March 2020; Asia Pacific is presented as discontinued operations for current and prior periods. The company also acquired 60% of Jack’s Flight Club in January 2020 and now reports North America, Europe and Jack’s Flight Club as operating segments.
Financial highlights
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Revenue | $7.0 million | $26.6 million | $27.3 million | $55.8 million |
| Gross profit | $4.9 million | $23.9 million | $22.5 million | $50.2 million |
| Gross margin | 69.4% | 90.0% | 82.3% | 90.1% |
| Operating income (loss) | $(6.6) million | $4.2 million | $(12.0) million | $10.7 million |
| Net income (loss) attributable to Travelzoo | $(6.2) million | $1.3 million | $(12.8) million | $4.4 million |
| Net loss per diluted share | $(0.55) | $0.11 | $(1.13) | $0.36 |
- Second-quarter revenue declined approximately 74% year over year; six-month revenue declined approximately 51%.
- Second-quarter operating margin was negative 94.7%, compared with positive 15.6% in the prior-year quarter. Six-month operating margin was negative 43.8%, compared with positive 19.3%.
- Sales and marketing expense declined to $4.3 million in the quarter from $13.1 million, while product development expense declined to $566,000 from $1.8 million.
- General and administrative expense increased to $6.6 million in the quarter from $4.9 million, primarily reflecting $3.6 million of incremental stock-based compensation associated with amended and newly granted options, partly offset by a $1.5 million gain from forgiveness of Jack’s Flight Club purchase-related notes.
- Six-month impairment expense was $2.9 million, consisting primarily of $2.1 million of goodwill impairment and $810,000 of trade-name impairment related to Jack’s Flight Club.
Cash flow, liquidity and debt
| Metric | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|
| Cash provided by operating activities | $13.4 million | $1.6 million |
| Cash used in investing activities | $1.3 million | $874,000 |
| Cash used in financing activities | $5.3 million | $4.7 million |
| Net increase (decrease) in cash and restricted cash | $6.3 million | $(4.0) million |
- Cash and cash equivalents were $25.6 million at June 30, 2020, compared with $18.7 million at December 31, 2019. Including restricted cash and discontinued operations, total cash, cash equivalents and restricted cash were $27.0 million.
- Operating cash flow benefited substantially from a $10.3 million increase in accounts payable, a $6.2 million decrease in accounts receivable, $4.1 million of stock-based compensation and $2.9 million of impairment charges. It therefore does not represent cash generation solely from profitable operations.
- Working capital was negative $14.8 million, largely because merchant payables increased to $20.8 million from $6.1 million. Merchant obligations are generally payable when vouchers are redeemed.
- Debt included $1.7 million of promissory notes due in June 2021 and $3.7 million of Paycheck Protection Program loans due in 2022, with a 1% interest rate. The company intends to seek forgiveness of eligible PPP amounts.
- Operating lease liabilities totaled $16.5 million at June 30, 2020, including $4.4 million current and $12.1 million long term.
- Management stated that cash on hand was expected to fund working capital needs for at least the next twelve months based on projected voucher redemption patterns, but warned that accelerated redemptions, continued losses or weaker business performance could require additional financing.
Material changes versus the prior comparable period
- North America revenue fell to $4.2 million from $17.9 million in the quarter, and Europe revenue fell to $1.9 million from $8.7 million. Segment operating losses were $4.7 million in North America and $1.7 million in Europe, versus prior-year operating profits of $3.6 million and $584,000, respectively.
- Travel revenue declined to $5.7 million from $22.8 million in the quarter, while local revenue declined to $393,000 from $3.8 million. Management attributed the reductions primarily to fewer emails, fewer website advertisements and reduced local voucher sales.
- Jack’s Flight Club contributed $945,000 of second-quarter revenue and $1.6 million of revenue from acquisition through June 30. Its second-quarter operating loss was $248,000.
- Members totaled approximately 31.0 million at June 30, 2020, including 1.7 million Jack’s Flight Club subscribers, compared with 30.2 million consolidated members in the prior-year period. Consolidated revenue per member declined to $1.74 from $3.75.
- Asia Pacific discontinued operations generated a $795,000 net loss in the quarter and a $3.7 million net loss for the six months. The Japan subsidiary was sold for JPY1 and generated a disposal loss of approximately $128,000.
- Shares outstanding declined to 11.3 million from 11.5 million at year-end after $1.2 million of repurchases during the first six months. No shares were repurchased during the second quarter.
Guidance, outlook, risks and unusual items
- The company did not provide quantitative revenue or earnings guidance. Management expects COVID-19 to continue negatively affecting results beyond the first half of 2020, but stated that the duration and severity remain uncertain.
- Advertisers paused, canceled or stopped campaigns; hotel and travel partners experienced cancellations; and restaurant and spa voucher businesses experienced refund requests. Travelzoo reduced or stopped spending in areas including marketing, technology and human resources.
- Management reported a modest increase in Getaways hotel voucher sales as consumers sought refundable travel options, while demand for restaurant and spa offerings remained low.
- The Jack’s Flight Club settlement included $6.8 million paid to sellers, $1.7 million of new notes due in June 2021 at 12% interest, forgiveness of $1.5 million of outstanding amounts, and an estimated $448,000 expense for a potential additional payment tied to 2020 net income.
- Stock-based compensation was unusually high at $4.1 million for the first six months and included $3.6 million in the second quarter related to option repricing, increases and new grants. Approximately $7.9 million of unrecognized stock-based compensation remained at June 30, 2020 based on the disclosed awards.
- Accounts receivable allowances increased to $2.8 million from $1.1 million at year-end, reflecting heightened collection risk. The company also recorded a $2.4 million provision for losses on accounts receivable and other items in operating cash flow adjustments.
- Foreign currency risk remains relevant; management estimated that a hypothetical 10% adverse currency movement would have produced an incremental $423,000 foreign-exchange loss for the six months.
- Potential obligations include unrecognized tax benefits and interest of approximately $374,000, an indeterminate voluntary program for former Netsurfers promotional shareholders, lease commitments, voucher-related merchant payables and potential future Jack’s Flight Club purchase obligations.
Most important facts for investors to verify
- Whether travel and local advertising demand, voucher redemptions and refund activity recover as pandemic restrictions change.
- Whether operating cash flow remains positive after excluding working-capital benefits from increased merchant payables and reduced receivables.
- The timing and amount of potential PPP loan forgiveness and the company’s ability to meet the $1.7 million Jack’s Flight Club note maturity.
- Jack’s Flight Club subscriber retention, profitability and any future put/call or contingent payment obligations.
- The sustainability of cash resources given negative working capital, continuing operating losses and $16.5 million of lease liabilities.
- The impact of option grants and repricing on future stock-based compensation, dilution and reported earnings.
- Future impairment risk for Jack’s Flight Club goodwill and intangible assets, as well as the company’s ability to maintain compliance with tax and other contingencies.