Travelzoo Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. The filing contains unaudited condensed consolidated financial statements. Travelzoo is a global Internet media company generating primarily advertising revenue from travel, search, local deals and getaway products across North America and Europe. Asia Pacific operations are licensed to related entities and are not owned by Travelzoo.
Financial Performance and Position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $36.9 million | $41.3 million | $77.1 million | $83.5 million |
| Gross profit | $32.5 million | $36.9 million | $67.9 million | $75.1 million |
| Income from operations | $10.1 million | $7.8 million | $17.1 million | $15.8 million |
| Net income | $7.9 million | $5.2 million | $12.6 million | $10.8 million |
| Diluted earnings per share | $0.54 | $0.34 | $0.84 | $0.70 |
| Operating cash flow | Not separately provided | Not separately provided | $1.2 million | $16.5 million |
- Q2 revenue declined 10.7% year over year; six-month revenue declined 7.7%.
- Gross margin was 88.1% in Q2 and for the six months, compared with 89.3% and 89.9%, respectively, in the prior-year periods.
- Operating margin increased to 27.5% in Q2 from 18.8%, and to 22.3% for the six months from 18.9%. The improvement included a $3.5 million release of the reserve for unexchanged promotional shares.
- Net margin was 21.5% in Q2 and 16.3% for the six months, versus 12.6% and 12.9% in the comparable periods.
- Cash and cash equivalents were $60.5 million at June 30, 2014, down from $66.2 million at December 31, 2013. Approximately $48.1 million was held outside the United States.
- The company reported no outstanding debt and no material interest-rate exposure.
- Total assets were $97.9 million and stockholders’ equity was $38.9 million at June 30, 2014.
- Net cash used in investing activities was $1.2 million, primarily reflecting $1.4 million of property and equipment purchases. Net cash used in financing activities was $6.3 million, primarily reflecting $5.9 million of share repurchases and $0.5 million of reverse/forward split costs.
Material Changes Versus Prior Comparable Period
- North America revenue decreased 16.8% in Q2 and 14.3% for the six months, driven by lower Local, Search and Travel revenue. North America operating margin declined to 15.0% in Q2 from 19.5%.
- Europe revenue increased 5.7% in Q2 and 9.4% for the six months, primarily due to higher Travel revenue. Europe operating margin improved to 24.5% in Q2 from 17.1%.
- Consolidated Search revenue declined 35.1% in Q2 and 30.9% for the six months, while Local revenue declined 19.3% and 20.3%, respectively. Consolidated Travel revenue was broadly stable in Q2 and increased 2.9% for the six months.
- Sales and marketing expense declined $4.2 million in Q2 and $6.0 million for the six months, primarily due to lower Search traffic-acquisition spending and lower employee-related costs.
- General and administrative expense increased $0.9 million in Q2 and $1.0 million for the six months, primarily due to higher headcount and employee-related costs.
- Operating cash flow fell from $16.5 million to $1.2 million for the six months, mainly because of working-capital outflows, including decreases in accounts payable and accrued expenses and payments associated with the unexchanged promotional shares reserve.
- The company repurchased 260,500 shares for $5.9 million during the first six months and had authorization to repurchase an additional 268,000 shares at June 30, 2014.
Guidance, Outlook, Risks and Unusual Items
- Management expected Search revenue to decline by up to $2.0 million in the quarter ending September 30, 2014, compared with the third quarter of 2013, as the company reduced traffic-acquisition spending in a competitive market.
- Management was reviewing whether to merge, discontinue or replace SuperSearch and Fly.com. Search performance was affected by search-engine traffic challenges and weak mobile monetization.
- The company is developing hotel-booking platform capabilities and expects a potential shift from existing hotel revenue to commission-based revenue, which could reduce revenue depending on booking volume.
- The company released $3.5 million of its reserve for potential settlements concerning unexchanged promotional shares. Remaining states may assert claims relating to approximately 400,000 shares. The ultimate exposure remains uncertain and may depend on penalties, interest and the application of state unclaimed-property laws.
- The IRS proposed an adjustment relating to the 2009 sale of the Asia Pacific business that could result in approximately $23 million of additional federal and state tax expense, excluding interest and penalties. Travelzoo disputes the proposed adjustment and intends to contest it. No related liability was recorded for the quarter.
- Unrecognized tax benefits were approximately $9.3 million, with accrued interest and penalties of approximately $1.3 million. The filing also describes approximately $10.6 million of net unrecognized tax-benefit contingencies in contractual commitments disclosures.
- Travelzoo faces a patent-infringement lawsuit involving Fly.com; the company believes the claims are without merit and cannot estimate a potential loss. A previously disclosed derivative fiduciary-duty lawsuit was dismissed with prejudice in January 2014 and was not appealed.
- Key business risks include declining Search and Local revenue, competition for online advertising and traffic, changes in search-engine algorithms, mobile migration, voucher refund and merchant risks, tax examinations, unclaimed-property claims, foreign-currency exposure and dependence on advertisers and email distribution.
- The company expects cash on hand to fund working-capital needs for at least the next twelve months, although cash availability may be affected by foreign-held funds, tax payments, settlement obligations and continued investment in products and marketing.
Important Facts for Investors to Verify
- Whether Search and Local revenue declines persist and whether the planned reduction in traffic-acquisition spending improves profitability.
- The ultimate amount and timing of remaining state claims relating to unexchanged promotional shares, including whether payments exceed existing reserves.
- The outcome of the IRS proposed $23 million tax adjustment and related examinations.
- Whether the hotel-booking platform generates sufficient incremental bookings and commission revenue to offset development and operating costs.
- The sustainability of operating cash flow, particularly after working-capital movements, tax payments, share repurchases and settlement-related payments.
- The concentration of voting power: Azzurro held approximately 49.1% of outstanding shares and had a proxy representing approximately 50.4% of voting power at June 30, 2014.
- The effect of mobile usage, search-engine changes, competition and subscriber monetization on revenue per subscriber and future margins.