Travelzoo 2017 Form 10-K Summary
Business Context and Reporting Period
Travelzoo operates a global digital travel, entertainment and local-deals advertising platform serving approximately 29.4 million registered email members at year-end 2017. Revenue is generated primarily from advertising, listing fees, clicks, referrals, voucher sales and hotel-booking commissions. Operations are reported across Asia Pacific, Europe and North America.
This Form 10-K covers the fiscal year ended December 31, 2017. The filing also presents unaudited fourth-quarter results for the quarter ended December 31, 2017. During the first quarter, Travelzoo discontinued SuperSearch and Fly.com to focus on the Travelzoo brand; those results are reported as discontinued operations.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $106.5 million | $114.3 million | Down 6.8% |
| Gross profit | $93.6 million | $100.4 million | Down 6.8% |
| Gross margin | 87.9% | 87.9% | Flat |
| Income from continuing operations | $1.6 million | $6.0 million | Down 73.5% |
| Operating income | $4.5 million | $10.2 million | Down 55.4% |
| Net income | $3.5 million | $6.6 million | Down 46.7% |
| Net margin | 3.3% | 5.8% | Down 2.5 percentage points |
| Basic and diluted EPS | $0.27 | $0.47 | Down $0.20 |
| Operating cash flow | $2.1 million | $8.7 million | Down 76.2% |
| Capital expenditures | $0.7 million | $0.9 million | Down $0.2 million |
Fourth-quarter 2017 revenue was $27.0 million, compared with $26.8 million in the fourth quarter of 2016. Fourth-quarter net income was $0.7 million, compared with $0.9 million in the prior-year quarter. Fourth-quarter income from continuing operations was $0.7 million, compared with $1.0 million.
Revenue and Segment Trends
- Travel revenue was $90.1 million, down from $94.2 million, while Local revenue was $16.5 million, down from $20.1 million.
- Asia Pacific revenue declined 22% to $7.5 million and generated a $6.0 million operating loss, compared with a $3.9 million loss in 2016.
- Europe revenue declined 9% to $33.7 million; operating income fell to $2.3 million from $5.6 million.
- North America revenue declined 3% to $65.3 million, while operating income was $8.2 million, broadly comparable with $8.5 million in 2016.
- Local revenue declined in all regions, primarily because of fewer Local Deals vouchers sold. Travel revenue was affected by lower email volume, lower take rates, fewer Getaway vouchers and foreign-currency movements.
- North America represented 61% of consolidated revenue, Europe 32% and Asia Pacific 7%.
Cash, Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $22.6 million at December 31, 2017, down $4.3 million from year-end 2016. Approximately $16.4 million was held outside the United States.
- Working capital was $7.6 million, down from $14.6 million. Total assets were $45.7 million and stockholders’ equity was $13.1 million.
- The balance sheet does not report conventional interest-bearing debt at year-end. The related-party promissory note associated with the Asia Pacific acquisition was fully repaid in January 2016.
- Financing cash outflow was $9.7 million, primarily for repurchases of 1.0 million shares. Travelzoo repurchased an additional 3,000 shares in the fourth quarter at an average price of $8.78.
- Management stated that cash on hand should be sufficient for working capital needs for at least the next twelve months. No cash dividend is expected for the foreseeable future.
- Contractual commitments totaled $24.0 million, including $22.5 million of operating leases and $1.5 million of purchase obligations.
Material Changes and Unusual Items
- Discontinued operations contributed $1.9 million of after-tax income in 2017, including a $2.9 million gain from the sale of the Fly.com domain name. The discontinued business generated $2.1 million of revenue through discontinuation.
- Continuing-operations profitability deteriorated substantially despite stable gross margin, reflecting lower revenue and operating expenses that remained high relative to revenue.
- Sales and marketing expense declined modestly to $57.3 million, while product development expense increased slightly to $9.2 million. General and administrative expense was $22.6 million.
- The effective tax rate was 66%, compared with 40% in 2016. The company recorded a provisional $508,000 net tax expense related to the Tax Cuts and Jobs Act and had not completed its analysis of GILTI and BEAT provisions.
- Foreign currency movements reduced 2017 revenue in Asia Pacific and Europe by approximately $1.1 million combined.
- The company adopted new deferred-tax balance-sheet classification and share-based compensation guidance during 2017. It expected to adopt the new revenue-recognition standard on January 1, 2018, which could accelerate recognition of certain revenue from unredeemed vouchers.
Outlook, Management Commentary and Risks
The filing provides no formal quantitative revenue or earnings guidance. Management expects to continue investing in the Travelzoo brand, mobile products, social-media distribution and the hotel-booking platform. Management also expects continued fluctuations in sales and marketing, product development, general and administrative expenses and tax rates.
- Local Deals and Getaway face declining voucher demand, increased competition, lower take rates and potential refund exposure.
- The hotel-booking platform may increase near-term costs and may not generate sufficient incremental revenue; a shift toward commission-based hotel revenue could reduce reported revenue depending on booking volumes.
- Asia Pacific remains materially unprofitable and international operations are exposed to foreign-exchange, regulatory, tax, political and economic risks.
- Competition from Google, Amazon, Expedia, Priceline, TripAdvisor, Groupon, travel metasearch companies and traditional media could pressure audience growth, pricing and margins.
- The business depends heavily on email delivery, search-engine traffic, mobile adoption, third-party technology and payment-processing providers.
- Privacy, data-protection, anti-spam, voucher, unclaimed-property and hotel-tax regulations could increase compliance costs or liabilities. The European Union’s General Data Protection Regulation was scheduled to become effective in May 2018.
- Unrecognized tax benefits totaled $725,000, accrued tax interest was approximately $651,000, and the filing disclosed approximately $1.2 million of net unrecognized tax benefits including interest in liquidity discussions.
- The company remains subject to a voluntary cash-payment program for certain former promotional shareholders. Future cost cannot be reliably estimated and depends on valid claims and the stock price.
- Azzurro Capital, controlled by founder Ralph Bartel, held approximately 57.8% of outstanding shares, creating concentrated voting control and related-party considerations.
Most Important Facts for Investors to Verify
- Verify the continuing-operations trend separately from discontinued operations and the one-time Fly.com domain-sale gain.
- Assess whether revenue declines, particularly in Local Deals, Europe and Asia Pacific, are stabilizing or continuing.
- Review the sustainability of operating cash flow, given the decline to $2.1 million and the $9.7 million spent on share repurchases.
- Evaluate Asia Pacific’s recurring losses and the recoverability of its deferred tax assets and foreign net operating losses.
- Monitor the hotel-booking platform’s bookings, commission revenue, development costs and potential tax obligations.
- Review voucher refund reserves, merchant liabilities and unredeemed-voucher obligations.
- Confirm the final accounting impact of the Tax Act and subsequent adoption of the revenue-recognition standard.
- Consider liquidity relative to $24.0 million of contractual commitments and the concentration of cash held outside the United States.