Travelzoo Inc. 2014 Form 10-K Summary
Business Context and Reporting Period
Travelzoo is a global Internet media company that provides travel, entertainment, and local deals through websites, email newsletters, search tools, mobile applications, and voucher products. Revenue is generated primarily from advertising, click-based fees, listing fees, commissions, and voucher sales. The filing covers the fiscal year ended December 31, 2014; unaudited fourth-quarter information is also disclosed.
- Reportable segments: North America and Europe.
- 2014 revenue mix: 67% North America and 33% Europe.
- Reported audience: approximately 24.2 million members in North America and Europe, excluding approximately 3.5 million Asia Pacific members operated under license.
- Azzurro Capital held approximately 49.1% of outstanding shares and voting power of approximately 50.4% through a proxy as of December 31, 2014.
Financial Performance and Key Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $142.1 million | $158.2 million | Down 10.2% |
| Gross profit | $124.2 million | $140.8 million | Down 11.8% |
| Gross margin | 87.4% | 89.0% | Down 1.6 percentage points |
| Operating income | $21.1 million | $2.3 million | Up $18.8 million |
| Operating margin | 14.8% | 1.4% | Up 13.4 percentage points |
| Net income (loss) | $16.4 million | $(5.0) million | Returned to profitability |
| Diluted EPS | $1.10 | $(0.33) | Improved |
| Net cash from operations | $1.5 million | $16.9 million | Down $15.3 million |
Annual revenue by category was $96.5 million from Travel, $17.3 million from Search, and $28.3 million from Local. Travel revenue declined 2.0%, Search declined 27.9%, and Local declined 21.0% versus 2013.
Fourth-quarter 2014 revenue was $31.5 million versus $37.5 million in the fourth quarter of 2013. Fourth-quarter operating income was $1.2 million versus $4.5 million, and net income was $1.3 million versus $3.2 million. Fourth-quarter gross margin was approximately 86.4%, compared with approximately 87.5% in the prior-year quarter.
- Sales and marketing expense was $67.2 million, down from $74.9 million, primarily because of lower Search traffic-acquisition spending; member-acquisition costs increased.
- General and administrative expense was $43.5 million, up from $41.7 million, primarily because of higher compensation, product-development headcount, and professional services.
- Income tax expense was $4.8 million, producing a 23% effective tax rate versus 285% in 2013. The 2013 rate was distorted by the nondeductible $22.0 million promotional-share charge.
- Cash and cash equivalents were $54.8 million at year-end, down from $66.2 million. Approximately $41.8 million was held outside the United States.
- Working capital was $41.2 million; total assets were $90.5 million; stockholders’ equity was $39.8 million.
- The company reported no outstanding debt and no derivative transactions.
- 2014 investing cash use was $3.1 million, primarily for $3.3 million of property and equipment. Financing cash use was $6.3 million, including $5.9 million of share repurchases.
- The company repurchased 261,000 shares for approximately $5.9 million, with 268,000 shares remaining under the applicable authorization at year-end.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $16.2 million, driven by lower Local voucher sales, reduced Search traffic acquisition and clicks, and lower North American Travel revenue.
- North America revenue declined $16.8 million and operating income declined to $7.7 million from $16.6 million.
- Europe revenue increased $0.6 million to $46.9 million, while operating income declined to $5.8 million from $7.7 million due principally to higher member-acquisition costs and other expenses.
- Operating results benefited from a $7.6 million release of the reserve for unexchanged promotional-share settlements. This contrasts with the $22.0 million charge recorded in 2013.
- Operating cash flow fell substantially because 2014 working capital changes used cash, including payments and reserve reductions associated with promotional-share settlements.
- Cash declined partly because of $3.5 million of unfavorable foreign-currency translation effects.
- Consolidated members increased to 24.2 million from 23.3 million, but consolidated revenue per member decreased to $6.10 from $7.05 and revenue per employee decreased to $324 from $363.
Outlook, Commentary, Risks, and Unusual Items
Management did not provide formal numerical revenue or earnings guidance. Management expects to continue investing in mobile products, social-media distribution, member acquisition, product development, and a hotel-booking platform. The filing states that cash on hand is expected to fund working-capital needs for at least the next twelve months.
- Search revenue may continue to decline as search-engine competition, traffic-acquisition costs, algorithm changes, and weak mobile monetization pressure SuperSearch and Fly.com. Management was evaluating whether to merge, discontinue, or replace Search products.
- Local Deals and Getaway revenue has declined because of lower voucher demand, increased competition, and lower merchant take rates. Refund rates and merchant performance could affect liquidity and profitability.
- The hotel-booking platform requires additional development and operating investment and may produce lower revenue during the transition from existing hotel revenue to commission-based revenue.
- The IRS proposed additional federal and state tax expense of approximately $31 million, excluding interest and possible state penalties, relating primarily to the 2009 Asia Pacific business sale. The company disputes the proposed adjustment and recorded no additional liability for it in 2014.
- Unrecognized tax benefits, including accrued interest and penalties, totaled approximately $10.9 million at year-end. The company also disclosed approximately $570,000 of potential deferred tax liability associated with undistributed foreign earnings.
- The company settled remaining state claims related to unexchanged promotional shares, paid $3.7 million during 2014, and retained $1.4 million of reserve at year-end for payments expected after further due diligence. A voluntary cash program for qualifying former promotional shareholders remains open, with total future cost not reliably estimable.
- Travelzoo is defending a patent-infringement lawsuit involving Fly.com. The filing states that potential damages cannot be estimated.
- Operating lease commitments totaled $29.5 million and purchase obligations totaled $1.8 million at December 31, 2014.
- Key operating risks include intense competition, dependence on email and third-party traffic sources, mobile-platform changes, foreign-currency exposure, privacy and online regulation, cybersecurity, advertiser retention, and dependence on key personnel.
Most Important Facts for Investors to Verify
- Whether Travelzoo can stabilize or reverse declines in Search and Local revenue while scaling the hotel-booking platform.
- The ultimate cash and earnings impact of the IRS tax dispute, unrecognized tax benefits, and remaining promotional-share claims.
- Whether operating cash flow improves after the 2014 settlement-related working-capital outflows.
- The sustainability of reported profitability excluding the $7.6 million promotional-share reserve release.
- Cash accessibility, tax consequences, and liquidity implications of the $41.8 million held outside the United States.
- Progress in mobile monetization, member acquisition efficiency, revenue per member, and advertiser retention.
- Developments in the Fly.com patent litigation and any effect on the Search business.