Travelzoo Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2016. The unaudited consolidated results include Travelzoo Asia Pacific retrospectively as a common-control transaction. Travelzoo is a global media commerce company generating primarily advertising and commission revenue from travel, search, local deals, vouchers, and hotel-related products across Asia Pacific, Europe, and North America.
Financial Performance and Position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $34.0 million | $36.8 million | $68.9 million | $75.9 million |
| Gross profit | $30.4 million | $31.6 million | $61.2 million | $66.2 million |
| Gross margin | 89.4% | 85.8% | 88.9% | 87.2% |
| Operating income | $3.8 million | $2.3 million | $6.9 million | $5.3 million |
| Operating margin | 11.1% | 6.3% | 10.1% | 7.0% |
| Net income | $2.0 million | $0.8 million | $4.1 million | $1.6 million |
| Net margin | 5.9% | 2.3% | 5.9% | 2.1% |
| Diluted EPS | $0.14 | $0.06 | $0.29 | $0.11 |
- Revenue mix: Six-month Travel revenue was $50.3 million, Search revenue was $8.2 million, and Local revenue was $10.3 million. All three categories declined year over year.
- Cash flow: Six-month operating cash flow was $3.9 million, compared with $0.9 million in the prior-year period. Capital expenditures were $0.6 million.
- Liquidity: Cash and cash equivalents were $27.6 million at June 30, 2016, down from $35.1 million at December 31, 2015. Approximately $16.2 million was held outside the United States.
- Debt: The $5.7 million related-party note associated with the Asia Pacific acquisition was repaid in January 2016. No note payable remained at June 30, 2016.
- Balance sheet: Total assets were $60.2 million and stockholders’ equity was $19.7 million at June 30, 2016. Accounts receivable were $18.4 million, while accounts payable were $20.8 million.
- Share repurchases: The company repurchased 383,000 shares for $3.0 million during the quarter and 629,000 shares for approximately $5.0 million during the first six months. Approximately 427,000 shares remained authorized for repurchase at June 30, 2016.
Material Changes Versus the Prior Comparable Period
- Six-month revenue declined 9.3%, while second-quarter revenue declined 7.5%. The declines were principally driven by lower Local, Travel, and Search revenue in North America, reduced Search revenue in Europe, and lower Travel and Local revenue in Asia Pacific.
- Profitability improved despite lower revenue. Six-month operating income increased 30.4% and net income increased approximately 159%, primarily because cost of revenues and operating expenses declined faster than revenue.
- Cost of revenues declined 21.9% for the six months, reflecting lower third-party network payments and lower salary-related costs.
- Six-month sales and marketing expense declined 11.0%, primarily from lower employee-related and brand marketing costs. Product development expense declined 21.1%.
- Asia Pacific remained materially unprofitable, with a six-month operating loss of $2.3 million versus a $1.1 million loss in the prior-year period. Asia Pacific revenue declined 12.2%.
- Europe’s six-month operating income increased to $3.9 million from $1.8 million, despite a 5.6% revenue decline, primarily due to lower traffic acquisition, marketing, and personnel costs.
- North America’s six-month revenue declined 10.7%, but operating income increased to $5.3 million from $4.6 million because expenses declined more rapidly than revenue.
- Reported members increased to approximately 29.0 million from 28.0 million, but consolidated revenue per member declined to $4.77 from $5.29 on an annualized basis.
Guidance, Outlook, Commentary, and Risks
- Management expects cash on hand to fund working capital needs for at least the next twelve months, but notes that weaker-than-expected results, acquisitions, product investments, or other opportunities could require additional equity or debt financing.
- Management expects Search revenue to continue declining because of traffic-acquisition challenges, changing search algorithms, competition, and weak mobile monetization. The company may merge, discontinue, or replace Search products.
- Management expects continued investment in mobile products, social media, the hotel booking platform, international expansion, and audience acquisition. These investments may increase expenses and may not generate sufficient incremental revenue.
- Local revenue has declined because of competition, lower voucher volumes, and lower merchant take rates. The company also expects a shift from existing hotel revenue toward commission-based hotel revenue, which may reduce revenue depending on booking volume.
- The company’s IRS examination of its 2009 Asia Pacific business sale resulted in a Revenue Agent’s Report proposing approximately $31.0 million of additional federal tax, federal penalties, and state tax, excluding interest and possible state penalties. Travelzoo disagrees with the proposed adjustment and intends to contest it; no related liability adjustment was recorded.
- Unrecognized tax benefits were approximately $2.1 million, with accrued interest and penalties of approximately $0.9 million. The company states that tax audit outcomes and timing remain uncertain.
- Operating lease and purchase commitments totaled approximately $30.7 million at June 30, 2016, including $29.0 million of operating lease commitments.
- The company continues a voluntary cash program for certain former promotional shareholders. The ultimate cost cannot be reliably estimated because it depends on valid claims and the company’s stock price.
- Key business risks include dependence on online advertising and email distribution, mobile and search-engine changes, intense competition, declining voucher demand, foreign exchange exposure, international operating losses, merchant refunds, cybersecurity and payment processing, regulatory changes, and reliance on key personnel.
- Azzurro Capital, controlled by the founder’s family trust, held approximately 53.5% of outstanding shares at June 30, 2016, creating concentrated voting control and related-party transaction considerations.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2016. The company implemented an updated accounting system during the quarter.
Important Facts for Investors to Verify
- Verify the status, reserve treatment, and potential cash impact of the approximately $31.0 million IRS tax proposal, including interest and penalties.
- Assess whether lower revenue is stabilizing or reflects continuing structural pressure in Local, Search, and Travel products.
- Monitor Asia Pacific’s operating losses and whether planned marketing investment produces improved revenue and profitability.
- Evaluate the sustainability of improved margins, given that cost reductions rather than revenue growth drove much of the earnings improvement.
- Track cash held outside the United States, repurchase activity, remaining commitments, and the company’s stated liquidity for the next twelve months.
- Review the economics, adoption, and cost structure of the hotel booking platform and mobile offerings.
- Consider the effects of concentrated ownership and the related-party history of the Asia Pacific acquisition and loan repayment.