Business Context and Reporting Period
Company: Travelzoo Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: Travelzoo is a global Internet media company providing travel and entertainment deal information via websites, email newsletters (Top 20, Newsflash), and search tools (SuperSearch, Fly.com). The company operates in three segments: North America, Europe, and Asia Pacific.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2009 |
Six Months Ended June 30, 2009 |
|---|---|---|
| Revenues | $24,279 | $47,647 |
| Cost of Revenues | $1,511 | $2,774 |
| Gross Profit | $22,768 | $44,873 |
| Operating Expenses | $21,217 | $40,501 |
| Income from Operations | $1,551 | $4,372 |
| Net Income (Loss) | $(191) | $146 |
| Cash and Cash Equivalents | $15,544 | $15,544 |
| Net Cash Provided by Operating Activities | N/A | $2,071 |
Margins (Six Months Ended June 30, 2009):
- Gross Margin: 94.2%
- Operating Margin: 9.2%
- Effective Tax Rate: 96%
Debt and Liquidity: The company has no outstanding debt. Total current liabilities were $14.0 million, and total stockholders' equity was $23.5 million as of June 30, 2009.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 12% year-over-year for both the three and six-month periods ended June 30, 2009, compared to 2008.
- Segment Performance:
- North America: Revenue increased 3% (Q3) and 4% (YTD). Operating income declined as a percentage of revenue due to increased marketing spend for Fly.com.
- Europe: Revenue increased 57% (Q3) and 52% (YTD). Operating losses narrowed significantly compared to the prior year.
- Asia Pacific: Revenue increased 836% YTD to $1.0 million, though the segment remains unprofitable with an operating loss of $3.6 million for the six months.
- Cost of Revenues: Increased significantly (140% YTD) primarily due to fees related to user searches on the newly launched Fly.com and increased depreciation/maintenance costs.
- Net Income: The company reported a net loss of $191,000 for the quarter but a net income of $146,000 for the six-month period, compared to a net loss of $2.2 million for the same period in 2008.
Guidance, Outlook, and Risks
Management Commentary:
- Fly.com Launch: Launched in February 2009; significant resources are being allocated to its development and marketing, driving up costs.
- International Expansion: Management expects Europe to incur significant losses for the next 12-24 months and Asia Pacific for at least the next three years due to subscriber acquisition costs.
- Profitability: While profitable for the six months ended June 30, 2009, there is no assurance of future profitability. Operating margins are pressured by international expansion and competitive advertising rates.
Risks and Contingencies:
- Former Stockholder Claims: Potential claims from former Travelzoo.com Corporation stockholders could result in the issuance of up to 4.1 million additional shares or cash payments. A cash payment program is active, with costs dependent on stock price and valid claims.
- Tax Examination: The IRS has issued a Notice of Proposed Adjustment regarding tax deductions from 2005-2006 related to the former stockholder program. If agreed to, this could result in a payment of approximately $724,000.
- Market Sensitivity: Business is sensitive to the travel industry's health and general economic conditions. Intense competition may prevent advertising rate increases.
Investor Verification Checklist
- International Losses: Verify the sustainability of losses in Europe and Asia Pacific segments and the timeline to profitability.
- Fly.com Economics: Assess the return on investment for the Fly.com launch, given the sharp increase in cost of revenues and marketing expenses.
- Tax Liability: Monitor the resolution of the IRS examination regarding the 2005-2006 tax deductions and the potential $724,000 liability.
- Stockholder Claims: Track the volume of valid claims under the former stockholder cash payment program and the potential for dilution if share claims are successful.
- Cash Burn: Confirm that current cash reserves ($15.5 million) are sufficient to fund operations and expansion for the next 12 months without additional financing.