Travelzoo 2019 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Travelzoo provides curated travel, entertainment and lifestyle deals through websites, mobile applications, email publications, its Travelzoo Network, Local Deals, Getaway vouchers and a hotel booking platform. The company operates through Asia Pacific, Europe and North America segments and generates revenue primarily from advertising fees and transaction-based commissions.
This unaudited report covers the three months ended March 31, 2019, with comparisons to the three months ended March 31, 2018. Travelzoo reported approximately 29.9 million members and had 11.9 million common shares outstanding as of April 25, 2019. Azzurro Capital, controlled by founder Ralph Bartel, owned approximately 50.1% of outstanding shares.
Financial Performance and Key Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $30.825 million | $30.884 million | Down $59,000 |
| Gross profit | $27.879 million | $27.499 million | Up $380,000 |
| Gross margin | 90.4% | 89.0% | Up 1.4 percentage points |
| Income from operations | $4.971 million | $3.657 million | Up $1.314 million |
| Operating margin | 16.1% | 11.8% | Up 4.3 percentage points |
| Net income | $3.120 million | $2.502 million | Up $618,000 |
| Net margin | 10.1% | 8.1% | Up 2.0 percentage points |
| Diluted EPS | $0.26 | $0.20 | Up $0.06 |
| Net cash from operating activities | $3.406 million | $179,000 | Up $3.227 million |
Travel revenue increased to $27.429 million from $26.990 million, while Local revenue declined to $3.396 million from $3.894 million. Sales and marketing expense was $15.606 million, product development expense was $1.703 million and general and administrative expense was $5.599 million. The effective tax rate increased to 36% from 34%, primarily because of the geographic mix of income and unbenefited foreign losses.
Revenue by segment was $1.665 million in Asia Pacific, $10.573 million in Europe and $18.587 million in North America. Segment operating results were a $1.635 million loss in Asia Pacific, $2.137 million of profit in Europe and $4.469 million of profit in North America.
Liquidity, Cash Flow and Capital Structure
- Cash and cash equivalents were $19.946 million at March 31, 2019, compared with $18.017 million at December 31, 2018. Cash, cash equivalents and restricted cash totaled $21.271 million.
- Operating cash flow was $3.406 million. Investing cash flow was a $131,000 use, primarily for property and equipment purchases.
- Financing cash flow was a $1.617 million use, primarily reflecting the repurchase of 100,000 shares for $1.6 million, or $15.90 per share.
- The filing states that cash on hand is expected to be sufficient for working capital needs for at least the next twelve months.
- The filing does not disclose conventional bank debt or other material borrowing facilities. Lease liabilities totaled $16.759 million following adoption of ASC 842, including $5.508 million current and $11.251 million long-term.
- Approximately $11.5 million of cash was held outside the United States and could be subject to additional U.S. taxes if distributed in certain circumstances.
Material Changes Versus the Prior Comparable Period
- Revenue was essentially flat overall, but the mix improved: Travel revenue rose $439,000 while Local revenue declined $498,000.
- Asia Pacific revenue fell $357,000, primarily from fewer emails and fewer Local Deals vouchers, while its operating loss improved by $105,000.
- Europe revenue increased $293,000, driven by increased vacation-package bookings, and operating profit rose $171,000.
- North America revenue was essentially unchanged, but operating profit increased $1.038 million because of lower salary and professional-service expenses.
- Cost of revenues decreased $439,000, while product development expense decreased $808,000, primarily due to lower headcount and professional-service costs.
- Accounts receivable increased to $15.579 million from $12.646 million at year-end 2018, contributing to a $2.980 million operating cash use.
- Average member acquisition cost increased to $3.47 from $2.72, while total members increased modestly to 29.891 million from 29.714 million.
- ASC 842 lease accounting was adopted January 1, 2019, adding approximately $14.264 million of right-of-use assets and $16.759 million of lease liabilities at March 31, 2019.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing provides no specific revenue, earnings or margin guidance. Management expects continued investment in audience acquisition, mobile and social-media capabilities, international operations, the hotel platform and package-offer technology. Management also expects expense levels and tax rates to fluctuate and states that cash resources should support operations for at least the next twelve months.
- Local Deals revenue has declined because of competition, lower voucher demand and lower average merchant take rates.
- The company expects a possible shift from existing hotel revenue to commission-based hotel revenue, which could reduce reported revenue depending on booking volume.
- Asia Pacific remains materially unprofitable, with a first-quarter operating loss equal to 98.2% of segment revenue.
- WeekenGO, a German start-up in which Travelzoo held a 25% interest, generated a $210,000 equity-method loss and related adjustments recognized during the quarter. In April 2019, Travelzoo invested an additional $673,000 and increased ownership to 26.6%.
- Travelzoo recorded a $159,000 cash-flow adjustment for its equity investment in WeekenGO; the investment was carried at $2.483 million at March 31, 2019.
- The company continues a voluntary cash program for potential former Travelzoo.com Corporation promotional shareholders. No payments were made in the quarter, but the ultimate cost cannot be reliably estimated. The company has incurred $2.9 million under the program since inception.
- Unrecognized tax benefits were approximately $213,000, with accrued interest of approximately $218,000. Total tax-related contingencies, including interest, were approximately $432,000.
- Principal risks include intense competition, dependence on advertising and email engagement, mobile-platform changes, search-engine traffic costs, declining voucher demand, hotel-platform execution, foreign-exchange exposure, tax and regulatory changes, cybersecurity and payment risks, and potential volatility in travel demand.
- A hypothetical 10% adverse foreign-exchange movement would have produced an incremental estimated foreign-exchange loss of $53,000 at March 31, 2019. The company does not hedge these exposures with derivatives.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2019, and reported no material changes to internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether Travelzoo can sustain improved operating margins despite flat consolidated revenue and declining Local revenue.
- Whether increased member acquisition costs translate into higher engagement, bookings and advertising revenue.
- The pace at which Asia Pacific can reduce its operating losses and whether Europe’s vacation-package growth continues.
- The profitability, revenue-recognition effects and required investment associated with the hotel platform, package technology and WeekenGO investment.
- The adequacy of cash reserves after share repurchases, lease obligations, foreign cash restrictions and potential Netsurfer, tax or litigation-related payments.
- The effect of foreign exchange, mobile usage, competition and changes in online advertising economics on future revenue and margins.
- The terms and implementation of the May 2019 authorization to repurchase up to 1,000,000 additional shares.