Business Context and Reporting Period
Company: Travelzoo Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 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 two primary segments: North America and Europe. The Asia Pacific segment was classified as discontinued operations following an agreement to sell these assets to Azzurro Capital Inc., a company controlled by Travelzoo's majority shareholder.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2009 | 9 Months Ended Sep 30, 2009 |
|---|---|---|
| Revenues | $23,576 | $70,194 |
| Cost of Revenues | $1,464 | $4,140 |
| Gross Profit | $22,112 | $66,054 |
| Operating Income (Continuing Ops) | $2,280 | $10,184 |
| Net Loss (Total) | $(295) | $(148) |
| Cash and Cash Equivalents | $15,694 | $15,694 (Ending Balance) |
| Operating Cash Flow (9 Months) | N/A | $2,719 |
Margins (9 Months 2009):
- Gross Margin: 94.1%
- Operating Margin (Continuing Ops): 14.5%
- Effective Tax Rate: 52%
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 27% year-over-year for the quarter ($23.6M vs. $18.6M) and 15% for the nine-month period ($70.2M vs. $61.2M).
- North America: Revenue increased 18% (quarter) and 8% (nine months). Growth was driven by publications and the new Fly.com search engine.
- Europe: Revenue increased 83% (quarter) and 63% (nine months). In local currency, growth was 110% and 104% respectively. A stronger U.S. dollar negatively impacted reported revenue by approximately $0.5M (quarter) and $2.4M (nine months).
- Profitability: Operating income from continuing operations increased to $2.3M for the quarter and $10.2M for the nine months. However, the company reported a net loss of $0.3M (quarter) and $0.1M (nine months) due to a loss of $1.6M (quarter) and $5.1M (nine months) from discontinued Asia Pacific operations.
- Cost Structure: Cost of revenues increased as a percentage of revenue (from 4.4% to 6.2% in the quarter) primarily due to fees associated with the Fly.com search engine. Sales and marketing expenses increased significantly to drive subscriber acquisition.
- Discontinued Operations: The Asia Pacific segment was sold to Azzurro Capital Inc. for $3.6 million (subject to adjustment). Results for this segment are now reported as discontinued operations.
Guidance, Outlook, and Risks
- Outlook: Management expects cash on hand ($15.7M) to be sufficient for working capital needs for at least the next 12 months. The company anticipates continued losses in its European operations as it invests in subscriber acquisition and market expansion.
- Strategy: Focus remains on international expansion (Europe), expanding product scope into entertainment, and growing the Fly.com meta-search engine.
- Key Risks:
- Profitability: No assurance of future profitability; European operations expected to incur losses for the next 12 months.
- Legal/Stockholder Claims: Potential claims from former stockholders of Travelzoo.com Corporation regarding unissued shares from a 2002 merger. If successful, this could result in the issuance of up to 4,068,000 additional shares, causing significant dilution. The company has a cash payment program for these claims, but total costs are not reliably estimable.
- Tax Dispute: The IRS has proposed adjustments regarding tax deductions for the former stockholder payment program, potentially resulting in a $724,000 payment. The company has filed a protest.
- Competition: Intense competition from major portals (Google, Yahoo, Expedia) and travel agencies may pressure advertising rates and margins.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the final purchase price and working capital adjustments for the Asia Pacific sale to Azzurro Capital Inc. to understand the final financial impact of the discontinued segment.
- Former Stockholder Liability: Monitor the status of the cash payment program for former Travelzoo.com Corporation stockholders and the outcome of the IRS audit regarding tax deductions for these payments.
- European Segment Performance: Track the trajectory of European losses versus revenue growth to assess the timeline for profitability in this region.
- Fly.com Economics: Evaluate the cost-to-revenue ratio of the Fly.com search engine, as search fees are driving a notable increase in the cost of revenues.
- Subscriber Acquisition Costs: Review the "Average Cost per Acquisition" metrics to ensure marketing spend efficiency remains sustainable as competition increases.