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, local deals and Getaways products. The company reported unaudited results for the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. Operations are reported in North America and Europe; the Asia Pacific business is operated by related parties under a license agreement and is not owned by Travelzoo.
Key Financial Metrics
| Metric | Three Months 2013 | Three Months 2012 | Nine Months 2013 | Nine Months 2012 |
|---|---|---|---|---|
| Revenue | $37.3 million | $35.4 million | $120.8 million | $114.1 million |
| Gross profit | $32.9 million | $31.5 million | $108.0 million | $102.5 million |
| Gross margin | 88.4% | 88.7% | 89.5% | 89.8% |
| Operating income (loss) | $(18.0) million | $4.2 million | $(2.2) million | $21.1 million |
| Net income (loss) | $(19.0) million | $3.4 million | $(8.2) million | $14.4 million |
| Diluted earnings (loss) per share | $(1.24) | $0.22 | $(0.54) | $0.90 |
| Operating cash flow | Not separately provided | Not separately provided | $18.7 million | $23.7 million |
Cash and cash equivalents were $77.9 million at September 30, 2013, up from $61.2 million at December 31, 2012. Restricted cash was $1.6 million. The company had no outstanding debt or derivative transactions. Current liabilities were $66.1 million, including a $25.0 million reserve for unexchanged promotional shares. Stockholders’ equity was $36.0 million.
Capital expenditures were $3.6 million for the first nine months of 2013. Net cash used in investing activities was $1.8 million, including a $1.8 million release of restricted cash. Financing activities used no cash. Management stated that cash on hand should fund working capital needs for at least the next 12 months, although $41.9 million of cash was held outside the United States and could be subject to additional U.S. taxes if distributed.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 5.1%, and nine-month revenue increased 5.8% year over year.
- Travel revenue increased to $23.2 million in the third quarter and $74.7 million for the first nine months, driven primarily by Getaways voucher sales and increased email delivery.
- Search revenue declined to $6.0 million in the third quarter and $19.4 million for the first nine months, primarily because of fewer revenue-generating clicks.
- Local revenue declined to $8.0 million in the third quarter and $26.7 million for the first nine months, primarily because fewer Local Deals vouchers were sold.
- Sales and marketing expense increased 5.9% in the third quarter and 15.7% for the first nine months, mainly because of higher employee-related costs and headcount investments.
- General and administrative expense increased 6.9% in the third quarter and 7.3% for the first nine months.
- The reported operating loss and net loss were driven primarily by a $22.0 million charge for unexchanged promotional shares. Excluding this unusual charge, the company reported operating income of approximately $4.0 million for the third quarter and approximately $19.8 million for the first nine months, based on the filing’s reported figures.
- North America operating margin declined to 9.6% in the third quarter and 16.1% for the first nine months, from 12.4% and 22.0%, respectively. Europe operating margin improved to 13.3% in the third quarter but declined to 17.2% for the first nine months.
- Reported subscribers increased to 23.2 million, excluding 3.6 million Asia Pacific subscribers. Consolidated revenue per subscriber increased slightly to $6.64 from $6.61, while revenue per employee declined to $333,000 from $348,000.
Guidance, Outlook, Commentary and Risks
Travelzoo did not provide quantified revenue or earnings guidance. Management expects continued investment in sales and marketing, product development, mobile and social-media capabilities, and a hotel booking platform. The company expected incremental legal and professional costs of more than $300,000 and additional hotel-platform development costs exceeding $400,000 in the fourth quarter of 2013.
Management expects revenue and expense fluctuations due to competition, advertiser demand, subscriber acquisition costs, changes in consumer behavior toward mobile devices, foreign exchange movements and the mix of travel, search and local products. The company stated that it may reduce operations and marketing spending if business performance is less favorable than expected.
The company recorded a $22.0 million reserve in the third quarter for expected one-time cash payments under a settlement with 34 states and potential future claims by 15 additional states concerning unexchanged promotional shares. The settlement relates to approximately 700,000 shares, while the remaining states may assert claims involving approximately 400,000 shares. Payments are expected to be made from cash on hand, but timing and ultimate exposure remain uncertain.
Other contingencies include approximately $9.4 million of unrecognized tax benefits, ongoing federal and state tax examinations, a patent infringement lawsuit involving Fly.com for which potential loss could not be estimated, and approximately $33.1 million of future operating lease payments. Prior securities class-action and derivative litigation was dismissed or withdrawn without prejudice or with prejudice as described in the filing.
Key business risks include intense competition, declining voucher volumes, reliance on advertising and email distribution, mobile-platform disruption, merchant refund obligations, regulatory treatment of vouchers and online taxes, foreign currency exposure, dependence on key personnel, technology and service interruptions, and effective control by Azzurro Capital, which held approximately 47.1% of outstanding shares.
Important Facts for Investors to Verify
- Confirm the timing and cash amount of payments under the 34-state unclaimed-property settlement and the potential exposure to the remaining 15 states.
- Assess operating performance excluding, and including, the $22.0 million promotional-share charge.
- Monitor whether travel-revenue growth offsets continuing declines in Search and Local revenue.
- Evaluate the return on increased headcount, subscriber acquisition, mobile investment and hotel-booking-platform costs.
- Review the company’s unusually high nine-month effective tax rate of negative 351.1% and the status of uncertain tax positions and tax examinations.
- Assess liquidity after expected settlement payments, with substantial cash held outside the United States and no debt facility disclosed.
- Track litigation, patent claims, voucher-related regulation, refund exposure and potential tax liabilities that the filing states cannot be reliably estimated.