Travelzoo 2018 Form 10-K Summary
Business context and reporting period
Travelzoo operates a global digital travel, entertainment and local-deals advertising platform through websites, email publications, mobile applications and third-party distribution partners. The filing covers the fiscal year ended December 31, 2018, including fourth-quarter results. Revenue is primarily generated from advertising and transaction-based fees associated with vouchers and hotel bookings.
- Geographic revenue mix: North America 61%, Europe 32% and Asia Pacific 7%.
- Reported approximately 29.7 million members, 6.1 million mobile application downloads and 4.6 million social-media followers at year-end.
- Azzurro Capital, controlled by founder Ralph Bartel, owned approximately 50.5% of outstanding shares at December 31, 2018.
- Travelzoo invested approximately $3.0 million for a 25% interest in WeekenGO, a German vacation-packaging technology company.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $111.3 million | $106.5 million | Up 4.5% |
| Gross profit | $99.1 million | $93.6 million | Up 5.8% |
| Gross margin | 89.0% | 87.9% | Up 1.1 percentage points |
| Income from continuing operations | $4.7 million | $1.6 million | Up $3.1 million |
| Operating income | $8.2 million | $4.5 million | Up 81% |
| Operating margin | 7.4% | 4.3% | Up 3.1 percentage points |
| Net income | $4.7 million | $3.5 million | Up 32% |
| Diluted EPS | $0.37 | $0.27 | Up $0.10 |
| Operating cash flow | $5.3 million | $2.1 million | Up $3.2 million |
Fourth-quarter 2018 revenue was $27.1 million versus $27.0 million in the fourth quarter of 2017. Fourth-quarter net income was $1.6 million versus $675,000 in the comparable period.
- Travel revenue increased to $94.4 million from $90.1 million; local revenue increased to $17.0 million from $16.5 million.
- Sales and marketing expense increased to $58.5 million from $57.3 million, while product development expense declined to $9.0 million from $9.2 million.
- Income tax expense was $3.6 million, with an effective tax rate of 44%, compared with 66% in 2017.
- Cash and cash equivalents were $18.0 million at year-end, including $12.9 million held outside the United States. Working capital was $6.4 million.
- The company reported no material debt balance in the provided balance sheet. The related-party loan associated with the Asia Pacific acquisition was fully repaid in 2016.
- Cash used in investing activities was $3.7 million, primarily reflecting the WeekenGO investment and capital expenditures. Cash used in financing activities was $5.3 million, primarily for share repurchases.
Material changes versus the prior comparable period
- Revenue growth was driven by higher travel advertising revenue in North America and Europe and higher European local-deals revenue. Asia Pacific revenue increased 5% after declining 22% in 2017.
- Europe operating income increased to $5.0 million from $2.3 million, while North America operating income increased to $9.6 million from $8.2 million.
- Asia Pacific remained materially loss-making, with an operating loss of $6.3 million compared with $6.0 million in 2017.
- Local revenue remains below 2016 levels, reflecting declining voucher volumes and lower merchant take rates.
- Travelzoo repurchased 500,000 shares for $5.3 million during 2018, reducing year-end shares outstanding to approximately 12.0 million from 12.5 million.
- The company adopted ASC 606 revenue recognition effective January 1, 2018 using the modified retrospective method. The adoption increased retained earnings by $1.3 million and primarily affected recognition of estimated proceeds from unredeemed vouchers and hotel commissions; the reported 2018 impact was not material.
- SuperSearch and Fly.com were discontinued in 2017; 2018 therefore had no discontinued-operations income, compared with $1.9 million in 2017, which included a gain on the sale of the Fly.com domain.
Guidance, outlook, management commentary, risks and unusual items
Management did not provide specific numerical revenue or earnings guidance in the filing. Management expects to fund current operations and working-capital needs with cash on hand and believes available cash is sufficient for at least the next twelve months. The company expects continued investment in mobile products, its hotel-booking platform, vacation-packaging technology, international operations and member acquisition.
- Key strategic risks include intense competition from Google, online travel agencies, metasearch providers, voucher businesses and traditional media companies.
- The business is exposed to declining consumer demand for vouchers, advertiser attrition, shifts from email and desktop usage to mobile platforms, search-engine algorithm changes and rising customer-acquisition costs.
- Asia Pacific continues to generate significant operating losses and may require additional investment without assurance of profitability.
- Privacy, data-security, anti-spam, consumer-protection, gift-card, sales-tax and international regulatory requirements could increase costs or create liabilities. GDPR became effective in 2018, and the company was evaluating the effect of the South Dakota v. Wayfair decision.
- Refund reserves, doubtful accounts, tax positions and other loss contingencies depend on management estimates. The filing reports approximately $425,000 of net unrecognized tax benefits, including interest, as of year-end.
- Contractual commitments totaled approximately $17.2 million, including $16.7 million of net operating-lease commitments and $471,000 of purchase obligations.
- The company’s investment in WeekenGO generated a $218,000 share of losses and amortization in 2018. WeekenGO also signed a $2.1 million advertising insertion order, of which Travelzoo recognized $319,000 of advertising revenue in 2018.
- In February 2019, Travelzoo repurchased 100,000 shares from Azzurro for $1.5 million under a transaction approved by a special committee of independent directors.
- PricewaterhouseCoopers issued an unqualified opinion on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Most important facts for investors to verify
- Whether revenue growth and improved margins can continue after the 2018 rebound, particularly in North America and Europe.
- The scale, persistence and funding requirements of Asia Pacific’s operating losses.
- Progress toward monetizing the hotel-booking platform, package offerings and WeekenGO investment.
- Trends in local voucher volumes, merchant take rates, refund reserves and related merchant payables.
- Cash availability after share repurchases, international cash restrictions, taxes, lease commitments and potential investments.
- The effect of ASC 606 adoption and subsequent accounting changes on revenue timing and comparability.
- Potential exposure from privacy regulation, sales and hotel taxes, gift-card and voucher laws, unrecognized tax positions and the continuing voluntary program for former promotional shareholders.
- Corporate-governance and related-party considerations arising from Azzurro’s controlling ownership and its transactions with Travelzoo.