Travelzoo Inc. — Q3 2016 Form 10-Q Summary
Business Context and Reporting Period
Travelzoo is a global media-commerce company serving more than 29 million members across Asia Pacific, Europe and North America. It generates revenue primarily from advertising fees across Travel, Search and Local products, including newsletters, websites, Fly.com, SuperSearch, hotel bookings, and Local Deals and Getaways vouchers. The filing covers the three and nine months ended September 30, 2016, with unaudited financial statements. Prior periods were retrospectively adjusted to include the Asia Pacific business acquired in 2015 as a common-control transaction.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $30.4 million | $33.7 million | $99.3 million | $109.7 million |
| Gross profit | $27.1 million | $29.0 million | $88.3 million | $95.2 million |
| Gross margin | 89.0% | 85.9% | 88.9% | 86.8% |
| Operating income | $2.2 million | $0.9 million | $9.1 million | $6.2 million |
| Operating margin | 7.2% | 2.6% | 9.2% | 5.6% |
| Net income | $1.6 million | $8.9 million | $5.7 million | $10.4 million |
| Diluted EPS | $0.12 | $0.60 | $0.40 | $0.71 |
| Operating cash flow | Not separately provided | Not separately provided | $1.9 million | $1.1 million |
Revenue declined approximately 9.8% year over year in the quarter and 9.5% for the first nine months. Net income declined primarily because the 2015 comparable periods included an $8.4 million tax benefit related to unexchanged promotional shares; the 2016 operating results nevertheless improved.
Liquidity, Capital Structure and Cash Flow
- Cash and cash equivalents were $24.8 million at September 30, 2016, down from $35.1 million at December 31, 2015. Approximately $13.5 million was held outside the United States.
- Net cash provided by operating activities was $1.9 million for the first nine months, compared with $1.1 million in the prior-year period.
- Capital expenditures were $0.8 million, producing net investing cash use of $0.8 million.
- Financing cash use was $11.3 million, including repayment of the $5.7 million related-party note and $5.7 million of stock repurchases.
- The related-party note was fully repaid in January 2016. The filing reports no outstanding debt at September 30, 2016.
- Operating lease commitments totaled $27.6 million and purchase obligations totaled $1.8 million, for total disclosed commitments of $29.5 million.
- Management stated that cash on hand is expected to fund working-capital needs for at least the next twelve months.
Material Changes Versus the Prior Comparable Period
- Gross margin improved because cost of revenues fell faster than revenue, primarily due to lower third-party network payments, voucher-related costs and employee costs.
- Operating income increased despite lower revenue, reflecting reduced sales and marketing, product development, and general and administrative expenses.
- Travel revenue declined to $22.2 million from $23.6 million in Q3 and to $72.5 million from $76.5 million for the first nine months.
- Search revenue declined to $3.6 million from $4.5 million in Q3 and to $11.8 million from $14.5 million for the first nine months.
- Local revenue declined to $4.6 million from $5.6 million in Q3 and to $14.9 million from $18.6 million for the first nine months, primarily due to fewer vouchers sold.
- Asia Pacific remained loss-making, with an operating loss of $0.8 million in Q3 and $3.1 million for the first nine months, compared with losses of $0.4 million and $1.5 million, respectively.
- Europe operating income improved to $1.6 million in Q3 and $5.5 million for the first nine months, while North America operating income improved to $1.4 million and $6.7 million, respectively.
- The company repurchased 64,000 shares for $582,000 during Q3. As of September 30, 2016, 363,000 shares remained authorized for repurchase.
Guidance, Outlook, Commentary and Risks
The filing does not provide formal revenue or earnings guidance. Management expects Search revenue to decline because of lower traffic acquisition, search-engine dynamics and poor mobile monetization. The company also expects continued pressure on Local revenue from competition, reduced consumer demand for vouchers and lower take rates.
- Travelzoo launched a fully responsive website in October 2016. The new site no longer features SuperSearch, which management expects to reduce SuperSearch revenue.
- Management expects continued investment in mobile products, social media, the hotel platform and member acquisition, although spending may be adjusted based on market conditions.
- Foreign exchange movements, competition from search engines, online travel agencies and voucher platforms, changes in consumer behavior, and advertiser retention are material operating risks.
- The IRS issued a Revenue Agent’s Report proposing additional federal tax, penalties and state tax expense of approximately $31.0 million, excluding interest and possible state penalties, relating primarily to the valuation of the Asia Pacific business sold in 2009. Travelzoo disagrees and intends to contest the proposal; no related liability was recorded for this proposed adjustment.
- The company had approximately $2.1 million of unrecognized tax benefits and $1.0 million of accrued interest and penalties at September 30, 2016. The filing states that the possible range of future adjustments cannot be estimated.
- The cost of the voluntary cash program for former promotional shareholders remains undeterminable because it depends on the number of valid claims and the company’s stock price.
- Future adoption of the new lease standard is expected to have a significant impact on the financial statements because the company has a significant number of leases.
- Azzurro Capital, controlled by founder and director Ralph Bartel, owned approximately 53.7% of outstanding shares, creating significant controlling-stockholder influence.
Most Important Facts for Investors to Verify
- Whether the decline in Travel, Search and Local revenue continues after the responsive website launch and the removal of SuperSearch.
- The ultimate outcome and potential cash exposure from the approximately $31.0 million IRS proposal, including interest and penalties.
- Whether Asia Pacific can reach profitability or will require continued investment and cash support.
- The sustainability of improved operating margins after expense reductions and lower traffic-acquisition spending.
- The availability and location of cash, including potential tax costs associated with repatriating foreign-held funds.
- The effect of voucher refunds, merchant obligations, unredeemed vouchers and changing take rates on future liquidity and profitability.
- The implications of Azzurro’s 53.7% ownership, related-party history and the company’s ongoing stock-repurchase program.