Travelzoo Inc. Form 10-Q Summary
Business Context and Reporting Period
Travelzoo is a global Internet media company that generates revenue primarily from advertising fees for travel, search, local deals, and voucher-based products. Its reportable segments are North America and Europe; Asia Pacific operations are operated by affiliates under license agreements. This filing covers the unaudited three months ended March 31, 2013, compared with the three months ended March 31, 2012.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $42.2 million | $39.3 million | 7.2% increase |
| Gross profit | $38.2 million | $35.3 million | 8.3% increase |
| Gross margin | 90.6% | 89.7% | Up 0.9 percentage points |
| Income from operations | $8.0 million | $6.6 million | 22.3% increase |
| Operating margin | 19.1% | 16.7% | Up 2.4 percentage points |
| Net income | $5.6 million | $3.7 million | 49.3% increase |
| Diluted EPS | $0.36 | $0.23 | Increase of $0.13 |
| Operating cash flow | $6.5 million | $9.8 million | 33.6% decrease |
Sales and marketing expense increased to $19.7 million from $16.3 million, primarily due to higher headcount and subscriber acquisition spending. General and administrative expense increased to $10.5 million from $9.4 million. The prior-year period included a $3.0 million charge related to unexchanged promotional merger shares; no comparable charge was recorded in Q1 2013.
Cash and cash equivalents were $65.1 million at March 31, 2013, including $25.3 million held outside the United States. Restricted cash was $3.3 million. Total assets were $102.4 million and stockholders’ equity was $48.0 million. The company reported no outstanding debt and no derivative transactions. Capital expenditures were $0.9 million.
Accounts payable included $22.1 million of merchant payables related to Local Deals and Getaway, compared with $23.4 million at December 31, 2012. Total operating lease and purchase commitments were $20.5 million, including $18.7 million of operating leases.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by Travel revenue, which increased to $26.8 million from $22.9 million, primarily from higher Getaway voucher sales and more travel publication emails delivered.
- Search revenue declined to $6.6 million from $7.3 million, reflecting fewer revenue-generating clicks and reduced traffic acquisition spending.
- Local revenue declined to $8.8 million from $9.1 million, primarily due to fewer Local Deals vouchers sold.
- North America revenue increased to $29.9 million from $28.6 million, while operating income declined to $5.5 million from $7.1 million as expense growth outpaced revenue growth.
- Europe revenue increased to $12.3 million from $10.8 million, and operating income increased to $2.6 million from $2.4 million. Europe represented approximately 29% of consolidated revenue.
- Subscribers increased to 22.9 million from 21.8 million, but consolidated average acquisition cost increased to $1.64 from $1.05. Revenue per subscriber increased to $7.51 from $7.33.
- Operating cash flow declined by $3.3 million, primarily because of lower accrued expenses, despite higher net income.
- Foreign currency translation reduced comprehensive income by $1.2 million, compared with a $0.5 million benefit in the prior-year period.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expects cash on hand to fund working capital needs for at least the next 12 months. The company expects continued investment in sales and marketing, headcount, mobile and social channels, analytics, and hotel-booking platform capabilities. Management indicated that incremental legal and professional fees and hotel platform development costs were expected to reduce diluted EPS by approximately $0.04 each during the quarter ending June 30, 2013.
The company expects operating expenses to remain elevated as it seeks to expand its subscriber base and develop new products. It cautions that revenue growth depends on advertiser demand, audience growth, competition, economic conditions, mobile adoption, and the performance of Local Deals, Getaway, Fly.com, and the planned hotel-booking platform.
The principal unresolved contingency concerns state unclaimed-property reviews involving unexchanged promotional merger shares. If all additional claims were upheld, the estimated cost would be approximately $20.7 million above accrued amounts, plus possible interest and penalties. The company disputes the claims and cannot estimate the ultimate outcome. It recorded $6,000 of cash-program expense in Q1 2013.
On March 29, 2013, a securities class action was dismissed by the U.S. District Court for the Southern District of New York; plaintiffs filed an appeal. Related derivative actions remained subject to further procedural developments. Travelzoo also faces a patent-infringement lawsuit involving Fly.com, for which the potential loss cannot be estimated.
The company reported approximately $9.4 million of unrecognized tax benefits and $0.8 million of accrued interest and penalties related to uncertain tax positions. It is subject to ongoing federal, state, and foreign tax examinations.
Management identified foreign currency exposure, competition, mobile-platform migration, subscriber acquisition costs, voucher refund risk, advertiser retention, legal and regulatory changes, tax exposure, technology dependence, and reliance on key personnel as material risks. A hypothetical 10% adverse currency movement was estimated to produce an incremental $91,000 foreign exchange loss for the quarter. Disclosure controls and procedures were considered effective as of March 31, 2013.
Most Important Facts for Investors to Verify
- Whether higher Travel and Getaway revenue can offset continued weakness in Search and Local revenue.
- Whether increased sales and marketing investment produces sufficient subscriber, advertiser, and revenue growth.
- The outcome and potential cash impact of state unclaimed-property claims involving unexchanged promotional merger shares.
- The status and potential cost of the Fly.com patent litigation and the appealed securities action.
- The sustainability of operating cash flow, particularly given merchant payables, refund obligations, and working-capital volatility.
- The effect of mobile adoption, hotel-platform development, and competitive pricing on margins and future revenue.
- Future effective tax rates after European tax-loss utilization and the resolution of uncertain tax positions.
- Foreign-currency effects on European results and comprehensive income.