Travelzoo Inc. Form 10-Q Summary
Business Context and Reporting Period
Travelzoo is a global Internet media company generating primarily advertising revenue from travel, search, and local-deal products. The company reported unaudited results for the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. Reportable segments are North America and Europe; Asia Pacific is operated by related-party entities under a license arrangement and is not owned by Travelzoo.
Key Financial Metrics
| Metric | Q2 2015 | Q2 2014 | Six Months 2015 | Six Months 2014 |
|---|---|---|---|---|
| Revenue | $34.1 million | $36.9 million | $70.6 million | $77.1 million |
| Gross profit | $29.2 million | $32.5 million | $61.4 million | $67.9 million |
| Gross margin | 85.6% | 88.1% | 87.0% | 88.1% |
| Income from operations | $2.6 million | $10.1 million | $6.4 million | $17.1 million |
| Operating margin | 7.6% | 27.5% | 9.0% | 22.3% |
| Net income | $1.3 million | $7.9 million | $3.2 million | $12.6 million |
| Diluted EPS | $0.09 | $0.54 | $0.22 | $0.84 |
| Operating cash flow | Not separately provided | Not separately provided | $2.8 million | $1.2 million |
- Q2 revenue decreased 7.6%; six-month revenue decreased 8.5%.
- Q2 operating income declined 74.6%, and six-month operating income declined 62.8%.
- Q2 net income declined 83.3%; six-month net income declined 74.2%.
- Cash and cash equivalents were $55.3 million at June 30, 2015, compared with $54.8 million at December 31, 2014. Approximately $39.4 million was held outside the United States.
- The company reported no outstanding debt and no derivative transactions.
- Total assets were $91.0 million and stockholders’ equity was $42.1 million at June 30, 2015.
- Accounts receivable were $17.4 million, while merchant payables associated with Local Deals and Getaways were $16.5 million.
Material Changes Versus the Prior Comparable Period
- North America revenue fell 6% in Q2 and 6% for the first six months, primarily because of lower Local Deals voucher sales and lower Travel revenue from Getaways vouchers and paid clicks. North America operating margin declined to 10.7% in Q2 from 15.0%.
- Europe revenue fell 12% in Q2 and 13% for the first six months. Foreign currency movements reduced reported European revenue by approximately $1.5 million in Q2 and $3.1 million for the six-month period.
- Europe operating income declined to $35,000 in Q2 from $2.9 million, reducing the segment operating margin to 0.3% from 24.5%.
- Consolidated Travel revenue declined $1.4 million in Q2 and $4.1 million for the six months. Local revenue declined $1.3 million in Q2 and $2.6 million for the six months. Search revenue was broadly stable in Q2 and increased $189,000 for the six months.
- Cost of revenues increased 12% in Q2, reducing gross margin by 2.5 percentage points. The increase primarily reflected higher payments to third-party Travelzoo Network partners.
- Sales and marketing expense increased $2.0 million in Q2 and $2.3 million for the six months, primarily from increased member acquisition and marketing costs.
- General and administrative expense decreased $1.3 million in Q2 and $1.5 million for the six months, primarily due to lower salary and employee-related costs, partly offset by higher professional fees.
- The prior-year periods included a $3.5 million favorable operating-expense adjustment related to unexchanged promotional shares; no comparable adjustment was recorded in 2015.
- Members in North America and Europe increased to 24.8 million from 23.7 million. However, consolidated revenue per member declined to $5.63 from $6.32, while average acquisition cost increased to $2.72 from $1.51.
Cash Flow, Liquidity, and Commitments
- Six-month operating cash flow was $2.8 million, compared with $1.2 million in the prior-year period.
- Investing cash outflow was $737,000, primarily for property and equipment. Financing cash outflow was $102,000, primarily related to reverse/forward stock-split costs; no shares were repurchased during Q2.
- Foreign exchange movements reduced cash by $1.5 million during the first six months. Net cash increased $471,000 to $55.3 million.
- Management expects cash on hand to fund working capital needs for at least the next twelve months.
- Contractual commitments totaled $29.2 million, including $26.8 million of operating leases and $2.4 million of purchase obligations.
Outlook, Commentary, Risks, and Unusual Items
- The filing provides no formal numerical revenue or earnings guidance. Management expects continued investment in member acquisition, mobile products, social media, the hotel booking platform, and international operations.
- Management stated that Search revenue may continue to decline because of traffic-acquisition challenges, poor mobile monetization, and competitive pressure. Travelzoo is evaluating whether to merge, discontinue, or replace SuperSearch and Fly.com products.
- Local revenue has been declining because of competition, reduced consumer demand, fewer vouchers sold, and lower merchant take rates. Management also expects a shift from existing hotel revenue toward commission-based hotel-booking revenue, which could produce lower revenue depending on booking volume.
- The effective tax rate increased to 48.9% in Q2 and 48.7% for the six months, compared with 22.2% and 27.4%, respectively. The increase primarily reflected a $565,000 tax expense for unrecognized state tax benefits and changes in the geographic mix of taxable income.
- The company had approximately $10.0 million of unrecognized tax benefits and $1.7 million of accrued interest and penalties at June 30, 2015. An IRS Revenue Agent’s Report proposes approximately $31 million of additional federal, penalty, and state tax expense, excluding interest and state penalties, related primarily to the 2009 Asia Pacific sale. Travelzoo disputes the proposed adjustment and has not recorded an additional liability for it.
- Travelzoo continues a voluntary cash program for certain former promotional shareholders. The total future cost is not reliably estimable; $1,000 was charged in Q2 2015.
- Metasearch Systems has asserted patent-infringement claims relating to Fly.com. The company believes the claims are without merit, intends to defend them vigorously, and cannot estimate a possible loss.
- Azzurro Capital held approximately 49.1% of outstanding shares and proxy voting power totaling approximately 50.4% at June 30, 2015. On July 2, 2015, Azzurro purchased 200,000 shares from Holger Bartel and thereafter directly held approximately 50.4% of outstanding shares.
- Foreign currency remains a material exposure. A hypothetical 10% adverse currency movement would have produced an estimated $201,000 incremental foreign-exchange loss for the six months ended June 30, 2015.
- Disclosure controls and procedures were effective as of June 30, 2015, with no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the sustainability of revenue and earnings given declines in Travel and Local revenue, lower revenue per member, and materially higher acquisition costs.
- Assess whether increased member acquisition, mobile investment, and hotel-platform spending can generate sufficient incremental revenue and cash flow.
- Monitor the IRS tax dispute, including the potential approximately $31 million exposure plus interest and penalties, and the company’s $11.7 million of unrecognized tax benefits including interest.
- Review the economic and governance implications of Azzurro’s majority voting control and related-party licensing, revenue-sharing, and service arrangements.
- Evaluate liquidity after considering $29.2 million of contractual commitments, cash held outside the United States, promotional-share claims, and potential tax or litigation payments.
- Track the Fly.com patent litigation and any changes in the estimated exposure.