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EXCEL - IDEA: XBRL DOCUMENT - TRAVELZOO | Financial_Report.xls |
EX-31.2 - EX-31.2 - TRAVELZOO | f59606exv31w2.htm |
EX-32.1 - EX-32.1 - TRAVELZOO | f59606exv32w1.htm |
EX-32.2 - EX-32.2 - TRAVELZOO | f59606exv32w2.htm |
EX-31.1 - EX-31.1 - TRAVELZOO | f59606exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File No.: 000-50171
TRAVELZOO INC.
(Exact name of registrant as specified in its charter)
DELAWARE (State or other jurisdiction of incorporation or organization) |
36-4415727 (I.R.S. employer identification no.) |
|
590 Madison Avenue, 37th Floor New York, New York (Address of principal executive offices) |
10022 (Zip code) |
Registrants telephone number, including area code: (212) 484-4900
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares of Travelzoo common stock outstanding as of August 4, 2011 was 16,461,553
shares.
TRAVELZOO INC.
Table of Contents
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PART IFINANCIAL INFORMATION
Item 1. | Financial Statements |
TRAVELZOO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value)
(Unaudited)
(In thousands, except par value)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 40,086 | $ | 41,184 | ||||
Accounts receivable, less allowance for doubtful accounts of $400 and $386 as of
June 30, 2011 and December 31, 2010, respectively |
15,936 | 13,290 | ||||||
Income tax receivable |
2,922 | 264 | ||||||
Deposits |
206 | 129 | ||||||
Prepaid expenses and other current assets |
1,625 | 1,489 | ||||||
Deferred tax assets |
1,411 | 1,411 | ||||||
Total current assets |
62,186 | 57,767 | ||||||
Deposits, less current portion |
869 | 279 | ||||||
Deferred tax assets, less current portion |
349 | 349 | ||||||
Restricted cash |
3,126 | 3,124 | ||||||
Property and equipment, net |
3,374 | 3,425 | ||||||
Intangible assets, net |
881 | 1,058 | ||||||
Total assets |
$ | 70,785 | $ | 66,002 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 15,665 | $ | 9,931 | ||||
Accrued expenses |
13,384 | 6,080 | ||||||
Deferred revenue |
1,441 | 1,325 | ||||||
Income tax payable |
146 | 650 | ||||||
Deferred rent |
212 | 218 | ||||||
Total current liabilities |
30,848 | 18,204 | ||||||
Deferred tax liabilities long-term |
160 | | ||||||
Long-term tax liabilities |
1,478 | 1,449 | ||||||
Deferred rent, less current portion |
560 | 460 | ||||||
Commitments and contingencies Stockholders equity: |
||||||||
Preferred stock, $0.01 par value per share (5,000 shares authorized; none issued) |
| | ||||||
Common stock, $0.01 par value (40,000 shares authorized; 16,462 and 16,444
shares issued and outstanding as of June 30, 2011 and December 31, 2010) |
165 | 164 | ||||||
Additional paid-in capital |
7,281 | 6,598 | ||||||
Retained earnings |
31,128 | 40,165 | ||||||
Accumulated other comprehensive loss |
(835 | ) | (1,038 | ) | ||||
Total stockholders equity |
37,739 | 45,889 | ||||||
Total liabilities and stockholders equity |
$ | 70,785 | $ | 66,002 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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Table of Contents
TRAVELZOO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
$ | 37,565 | $ | 28,106 | $ | 74,525 | $ | 56,624 | ||||||||
Cost of revenues |
2,499 | 1,616 | 4,918 | 3,270 | ||||||||||||
Gross profit |
35,066 | 26,490 | 69,607 | 53,354 | ||||||||||||
Operating expenses: |
||||||||||||||||
Sales and marketing |
19,137 | 14,049 | 35,291 | 29,041 | ||||||||||||
General and administrative |
8,301 | 6,505 | 16,695 | 13,217 | ||||||||||||
Settlement with State of Delaware |
| | 20,000 | | ||||||||||||
Total operating expenses |
27,438 | 20,554 | 71,986 | 42,258 | ||||||||||||
Income (loss) from operations |
7,628 | 5,936 | (2,379 | ) | 11,096 | |||||||||||
Other income and expense: |
||||||||||||||||
Interest income and other income |
43 | 45 | 75 | 87 | ||||||||||||
Gain (loss) on foreign currency |
(1 | ) | | 29 | (209 | ) | ||||||||||
Income (loss) before income taxes |
7,670 | 5,981 | (2,275 | ) | 10,974 | |||||||||||
Income taxes |
2,752 | 2,734 | 6,762 | 5,253 | ||||||||||||
Net income (loss) |
$ | 4,918 | $ | 3,247 | $ | (9,037 | ) | $ | 5,721 | |||||||
Basic net income (loss) per share |
$ | 0.30 | $ | 0.20 | $ | (0.55 | ) | $ | 0.35 | |||||||
Diluted net income (loss) per share |
$ | 0.30 | $ | 0.20 | $ | (0.55 | ) | $ | 0.35 | |||||||
Shares used in computing basic net income (loss) per share |
16,462 | 16,444 | 16,456 | 16,444 | ||||||||||||
Shares used in computing diluted net income (loss) per share |
16,585 | 16,453 | 16,456 | 16,452 |
See accompanying notes to unaudited condensed consolidated financial statements.
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TRAVELZOO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
(Unaudited)
(In thousands)
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (9,037 | ) | $ | 5,721 | |||
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
1,309 | 1,147 | ||||||
Deferred income tax |
160 | | ||||||
Stock-based compensation |
375 | 375 | ||||||
Provision for losses on accounts receivable |
43 | (1 | ) | |||||
Tax benefit of stock option exercise |
(268 | ) | | |||||
Net foreign currency effect |
(29 | ) | 209 | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(2,456 | ) | (2,568 | ) | ||||
Deposits |
(660 | ) | (85 | ) | ||||
Income tax receivable |
(2,390 | ) | 5,264 | |||||
Prepaid expenses and other current assets |
(117 | ) | (40 | ) | ||||
Accounts payable |
5,600 | (269 | ) | |||||
Accrued expenses |
7,185 | 1,657 | ||||||
Deferred revenue |
98 | 220 | ||||||
Deferred rent |
95 | 34 | ||||||
Income tax payable |
(519 | ) | 357 | |||||
Other non-current liabilities |
29 | 28 | ||||||
Net cash provided by (used in) operating activities |
(582 | ) | 12,049 | |||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(1,056 | ) | (751 | ) | ||||
Net cash used in investing activities |
(1,056 | ) | (751 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from exercise of stock options |
40 | | ||||||
Tax benefit of stock option exercise |
268 | | ||||||
Proceeds from sale of Asia Pacific business segment |
| 1,073 | ||||||
Net cash provided by financing activities |
308 | 1,073 | ||||||
Effect of exchange rate changes on cash and cash equivalents |
232 | (272 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
(1,098 | ) | 12,099 | |||||
Cash and cash equivalents at beginning of period |
41,184 | 19,776 | ||||||
Cash and cash equivalents at end of period |
$ | 40,086 | $ | 31,875 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid (received) for income taxes, net |
$ | 9,476 | $ | (368 | ) |
See accompanying notes to unaudited condensed consolidated financial statements.
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TRAVELZOO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: The Company and Basis of Presentation
Travelzoo Inc. (the Company or Travelzoo) is a global Internet media company. We inform
over 23 million subscribers in North Americ, Europe and Asia
Pacific, as well as millions of website users, about the best travel,
entertainment and local deals available from thousands of companies. Our deal experts source,
research and test-book offers, recommending only those that meet Travelzoos rigorous quality
standards. We provide travel companies, entertainment companies, and local businesses with a fast,
flexible, and cost effective way to reach millions of consumers. Our revenues are generated
primarily from advertising fees. In Asia Pacific, the Travelzoo business is operated by Travelzoo (Asia) Ltd. and
Travelzoo Japan K.K. under a license agreement with Travelzoo Inc.
Our publications and products include the Travelzoo websites (www.travelzoo.com,
www.travelzoo.ca, www.travelzoo.co.uk, www.travelzoo.de, www.travelzoo.es, www.travelzoo.fr, among
others), the Travelzoo Top 20 e-mail newsletter, the Newsflash e-mail alert service, the
SuperSearch pay-per-click travel search tool, and the Travelzoo Network, a network of third-party
websites that list travel deals published by Travelzoo. We also operate Fly.com, a travel search
engine that allows users to quickly and easily find the best prices on flights from hundreds of
airlines and online travel agencies. In August 2010, we launched Local Deals, a new service that
allows our subscribers to purchase vouchers for deals from local businesses such as spas and
restaurants through the Travelzoo website. Vouchers are redeemable at the local businesses during
the promotional period. We receive a percentage of the face value of the voucher from the local
businesses.
Starting November 1, 2009, the Travelzoo websites in Asia Pacific (cn.travelzoo.com,
www.travelzoo.co.jp, www.travelzoo.com.au, www.travelzoo.com.hk, www.travelzoo.com.tw, among
others), the Travelzoo Top 20 e-mail newsletters in Asia Pacific and the Newsflash e-mail alert
service in Asia Pacific have been published by Travelzoo (Asia) Limited and Travelzoo Japan K.K.,
wholly owned subsidiaries of Azzurro Capital Inc., under a license
agreement with the Company. There is a reciprocal revenue-sharing agreement
among the entities operating the Travelzoo business in Asia Pacific and the Company related to cross-selling audiences, channels and offers.
Travelzoo is controlled by Ralph Bartel, who held beneficially approximately 51.6% of the
outstanding shares as of August 1, 2011.
The accompanying unaudited condensed consolidated financial statements have been prepared by
the Company in accordance with the rules and regulations of the U.S. Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting principles in the
United States of America have been condensed or omitted in accordance with such rules and
regulations. In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of the Company, and its results of operations
and cash flows. These condensed consolidated financial statements should be read in conjunction
with the Companys audited consolidated financial statements and related notes as of and for the
year ended December 31, 2010, included in the Companys Form 10-K filed with the SEC on March 16,
2011.
The condensed consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. All foreign subsidiaries use the local currency of their respective
countries as their functional currency. Assets and liabilities are translated into U.S. dollars at
exchange rates prevailing at the balance sheet dates. Revenues, costs and expenses are translated
into U.S. dollars at average exchange rates for the period.
The results of operations for the three months ended June 30, 2011 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2011 or any other
future period, and the Company makes no representations related thereto.
The Company was formed as a result of a combination and merger of entities founded by the
Companys majority stockholder, Ralph Bartel. In 1998, Mr. Bartel founded Travelzoo.com
Corporation, a Bahamas corporation, which issued 5,155,874 shares via the Internet to approximately
700,000 Netsurfer stockholders for no cash consideration, but subject to certain conditions as
referred to below. In 1998, Mr. Bartel also founded Silicon Channels Corporation, a California
corporation, to operate the Travelzoo website. During 2001, Travelzoo Inc. was formed as a
subsidiary of Travelzoo.com Corporation, and Mr. Bartel contributed all of the outstanding shares
of Silicon Channels Corporation to Travelzoo Inc. in exchange for 8,129,273 shares of Travelzoo
Inc. and options to acquire an additional 2,158,349 shares at $1.00. Mr. Bartel exercised these
options in January 2009.
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In April 2002, Travelzoo.com Corporation was merged into Travelzoo Inc. Under and subject to
the terms of the merger agreement, stockholders were allowed a period of two years following the
effective date of the merger to receive one share of Travelzoo Inc in exchange for each outstanding share of common stock of Travelzoo.com Corporation. The records of Travelzoo.com
Corporation showed that, assuming all of the shares applied for by the Netsurfer stockholders were
validly issued, there were 11,295,874 shares of Travelzoo.com Corporation outstanding. As of April
25, 2004, two years following the effective date of the merger, 7,180,342 shares of Travelzoo.com
Corporation had been exchanged for shares of Travelzoo Inc. Prior to that date, the remaining
shares which were available for issuance pursuant to the merger agreement were included in the
issued and outstanding common stock of Travelzoo Inc. and included in the calculation of basic and
diluted earnings per share. After April 25, 2004, the Company ceased issuing shares to the former
stockholders of Travelzoo.com Corporation, and no additional shares are reserved for issuance to
any former stockholders, because their right to receive shares has now expired. On April 25, 2004,
the number of shares reported as outstanding was reduced from 19,425,147 to 15,309,615 to reflect
actual shares issued as of the expiration date. Earnings per share calculations reflect this
reduction of the number of shares reported as outstanding. As of June 30, 2011, there were
16,461,553 shares of common stock outstanding.
On April 21, 2011, the Company entered into an agreement with the State of Delaware resolving
all claims relating to an unclaimed property review which began in 2010. The primary issue raised
in the preliminary findings from the review, received by the Company on April 12, 2011, concerned
the shares of Travelzoo which have not been claimed by former stockholders of Travelzoo.com as
discussed in the preceding paragraph. In the preliminary findings under the unclaimed property
review, up to 3.0 million shares were identified as demandable under Delaware escheat laws. While
the Company continues to take the position that such shares were issuable only to persons who
establish their eligibility as stockholders, the Company determined that it was in its best
interest to promptly resolve all claims relating to the unclaimed property review. The Company made
a $20.0 million cash payment to the State of Delaware on April 27, 2011 and received a complete
release of those claims.
It is the Companys understanding that, under applicable law, if it holds unclaimed property
of third parties whose addresses are unknown, that property may be subject to escheat to the State
of Delaware, because it is the jurisdiction of incorporation of the Company. The number of shares
identified in the preliminary findings related almost entirely to parties with unknown addresses.
Accordingly, the settlement with the State of Delaware is expected to substantially limit any
further obligations of the Company under escheat and similar state laws.
If additional escheat claims are asserted in the future, the Company intends to challenge the
applicability of escheat rights, in that, among other reasons, the identity, residency, and
eligibility of the holders in question cannot be determined. There were certain conditions
applicable to the issuance of shares to the Netsurfer stockholders, including requirements that (i)
they be at least 18 years of age, (ii) they be residents of the U.S. or Canada, and (iii) they not
apply for shares more than once. The Netsurfer stockholders were required to confirm their
compliance with these conditions, and were advised that failure to comply could result in
cancellation of their shares in Travelzoo.com Corporation. Travelzoo.com Corporation was not able
to verify that the applicants met the requirements referred to above at the time of their
applications for issuance of shares. If claims are asserted by persons claiming to be former
stockholders of Travelzoo.com Corporation, the Company intends to assert that the claimant must
establish that the original Netsurfer stockholders complied with the conditions to issuance of
their shares. The Company is not able to predict the outcome of any future claims which might be
asserted relating to the unissued shares.
The Company is continuing its program under which it makes cash payments to people who
establish that they were former stockholders of Travelzoo.com Corporation, and who failed to submit
requests to convert their shares into shares of Travelzoo Inc. within the required time period. The
accompanying condensed consolidated financial statements include a charge in general and
administrative expenses of $77,000 for these cash payments for the three months ended June 30,
2011. The total cost of this program is not reliably estimable because it is based on the ultimate
number of valid requests received and future levels of the Companys common stock price. The
Companys common stock price affects the liability because the amount of cash payments under the
program is based in part on the recent level of the stock price at the date valid requests are
received. The Company does not know how many of the requests for shares originally received by
Travelzoo.com Corporation in 1998 were valid, but the Company believes that only a portion of such
requests were valid. As noted above, in order to receive payment under the program, a person is
required to establish that such person validly held shares in Travelzoo.com Corporation. Assuming
100% of the requests from 1998 were valid, and after taking into account the settlement with the
State of Delaware referred to above, former stockholders of Travelzoo.com Corporation holding
approximately 1.0 million shares had not submitted claims under the program as of June 30, 2011.
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Note 2: Revenue Recognition
The Companys revenue consists primarily of advertising sales. Advertising revenues are
principally derived from the sale of advertising in North America and Europe on the Travelzoo
website, in the Travelzoo Top 20 e-mail newsletter, in Newsflash, from SuperSearch, from the
Travelzoo Network, and from Fly.com. The Company also generates revenue from the sale of vouchers
through our Local Deals e-mail alert service.
The Company recognizes revenues in accordance with the SEC Staff Accounting Bulletin for
revenue recognition. Advertising revenues are recognized in the period in which the advertisement
is displayed, provided that evidence of an arrangement exists, the fees are fixed or determinable,
and collection of the resulting receivable is reasonably assured.
Where collectibility is not reasonably assured, the revenue will be recognized upon cash
collection, provided that the other criteria for revenue recognition have been met. The Company
recognizes revenue for fixed-fee advertising arrangements ratably over the term of the insertion
order as described below, with the exception of Travelzoo Top 20 or Newsflash insertions, which are
recognized upon delivery. The majority of insertion orders have terms that begin and end in a
quarterly reporting period. In the cases where at the end of a quarterly reporting period the term
of an insertion order is not complete, the Company allocates the total arrangement fee to each
element based on the relative estimated selling price of each element. The Company recognizes
revenue for the period based on elements delivered during the period. The Company uses prices
stated on its internal rate card, which represents stand-alone sales prices, to establish estimated
selling prices. The stand-alone price is the price that would be charged if the advertiser
purchased only the individual insertion. Fees for variable-fee advertising arrangements are
recognized based on the number of impressions displayed, number of clicks delivered, or number of
referrals generated during the period.
Under these policies, no revenue is recognized unless persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, and collection is deemed
reasonably assured. The Company evaluates each of these criteria as follows:
| Evidence of an arrangement. The Company considers an insertion order signed by the client or its agency to be evidence of an arrangement. |
| Delivery. Delivery is considered to occur when the advertising has been displayed and, if applicable, the click-throughs have been delivered. |
| Fixed or determinable fee. The Company considers the fee to be fixed or determinable if the fee is not subject to refund or adjustment and payment terms are standard. |
| Collection is deemed reasonably assured. Collection is deemed reasonably assured if it is expected that the client will be able to pay amounts under the arrangement as payments become due. If it is determined that collection is not reasonably assured, then revenue is deferred and recognized upon cash collection. Collection is deemed not reasonably assured when a client is perceived to be in financial distress, which may be evidenced by weak industry conditions, a bankruptcy filing, or previously billed amounts that are past due. |
Insertion orders that include fixed-fee advertising are invoiced upon acceptance of the
insertion order and on the first day of each month over the term of the insertion order, with the
exception of Travelzoo Top 20 or Newsflash insertions, which are primarily invoiced upon delivery.
Insertion orders that include variable-fee advertising are invoiced at the end of the month. The
Companys standard terms state that in the event that Travelzoo fails to publish advertisements as
specified in the insertion order, the liability of Travelzoo to the client shall be limited to, at
Travelzoos sole discretion, a pro rata refund of the advertising fee, the placement of the
advertisements at a later time in a comparable position, or the extension of the term of the
insertion order until the advertising is fully delivered. The Company believes that no significant
obligations exist after the full delivery of advertising.
Revenue from advertising sold to clients through agencies is reported at the net amount billed
to the agency.
During the third quarter of 2010, the Company started selling vouchers for deals from local
businesses such as spas and restaurants. The Company earns a fee for acting as an agent in these
transactions which is recorded on a net basis and is included in revenue upon completion of the
voucher sale. The Company applies a return allowance for potential voucher refunds based on historical experience.
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Note 3: Recent Accounting Standards
In October 2009, the FASB issued ASU 2009-13, a new accounting standard update for revenue
recognition with multiple deliverables. The new accounting standard update defines when individual
deliverables included in a multiple-element arrangement may be treated as separate units of
accounting. The update primarily provides two significant changes: 1) it eliminates the need for
objective and reliable evidence of the fair value for the undelivered element in order for a
delivered item to be treated as a separate unit of accounting, and 2) it eliminates the residual
method to allocate the arrangement consideration. In addition, the update also expands the
disclosure requirements for revenue recognition. Effective January 1, 2011, the Company adopted
this new accounting standard. The adoption of this new accounting standard did not have a material
impact on the Companys consolidated results of operations and financial condition.
In May 2011, the FASB issued ASU 2010-06, a new accounting standard, which amends the fair value
measurement guidance and includes some enhanced disclosure requirements. The most significant
change in disclosures is an expansion of the information required for Level 3 measurements based on
unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011.
The Company will adopt this new accounting standard on January 1, 2012 and is currently assessing
the future impact of this new accounting standard on the Companys consolidated results of operations and
financial condition.
In June 2011, the FASB issued ASU 2011-05, a new accounting standard update, which eliminates the current
option to report other comprehensive income and its components in the statement of stockholders
equity. Instead, an entity will be required to present items of net income and other comprehensive
income in one continuous statement or in two separate, but consecutive, statements. The standard is
effective for fiscal years beginning after December 15, 2011. The Company will adopt this new
standard effective January 1, 2012 and does not expect the adoption of this new accounting standard
will have a material impact on the Companys consolidated results of operations and financial condition.
Note 4: Financial Instruments
At June 30, 2011, restricted cash consisted primarily of a certificate of deposit for $875,000
serving as collateral for a standby letter of credit for the security deposit under the lease of
our corporate headquarters and a $2.3 million deposit with our bank in the U.K. for our merchant
account. Cash equivalents consist of highly liquid investments with remaining maturities of three
months or less on the date of purchase held in money market funds. The Company believes that the
carrying amounts of these financial assets are a reasonable estimate of their fair value. The fair
value of these financial assets was determined using the following inputs at June 30, 2011 (in
thousands):
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Active Markets | Other | Significant | ||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets: |
||||||||||||||||
Money market funds |
$ | 9,141 | $ | 9,141 | $ | | $ | | ||||||||
Total |
$ | 9,141 | $ | 9,141 | $ | | $ | | ||||||||
There have been no changes in level 2 and level 3 investments for the period ending June 30,
2011.
Note 5: Internal-Use Software and Website Development
The Company includes in fixed assets the capitalized cost of internal-use software and website
development, including software used to upgrade and enhance its website and processes supporting
the Companys business. Costs incurred in the planning stage and operating stage are expensed as
incurred while costs incurred in the application development stage and infrastructure development
stage are capitalized, assuming such costs are deemed to be recoverable.
As of June 30, 2011 and December 31, 2010, our capitalized internal-use software and website
development costs, net of accumulated amortization, were $245,000 and $465,000, respectively. For
the three months ended June 30, 2011 and 2010, the Company recorded amortization of capitalized
internal-use software and website development costs of $110,000 for each of these periods. For the
six months ended June 30, 2011 and 2010, the Company recorded amortization of capitalized
internal-use software and
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websites development costs of $220,000 for each of these periods.
Note 6: Intangible Assets
Intangible assets consist of the following (in thousands):
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Internet domain names |
$ | 2,117 | $ | 2,117 | ||||
Less accumulated amortization |
1,236 | 1,059 | ||||||
Total |
$ | 881 | $ | 1,058 | ||||
Intangible assets have a useful life of 5 years. For the three months ended June 30, 2011 and
2010, amortization expense was $88,000 for each period. For the six months ended June 30, 2011 and
2010, amortization expense was $177,000 for each period.
Future expected amortization expense related to intangible assets at June 30, 2011 is as
follows (in thousands):
2011 |
177 | |||
2012 |
352 | |||
2013 |
352 | |||
Total |
$ | 881 | ||
The expected amortization expense is an estimate. Actual amounts of amortization expense may
differ from estimated amounts due to additional intangible asset acquisitions, impairment of
intangible assets, accelerated amortization of intangible assets and other events.
Note 7: Certain Risks and Uncertainties
The Companys cash, cash equivalents and accounts receivable are potentially subject to
concentration of credit risk. Cash and cash equivalents are placed with financial institutions that
management believes are of high credit quality. The accounts receivable are derived from revenue
earned from customers located in the U.S. and internationally.
The Company maintains an allowance for doubtful accounts based upon its historical experience,
the age of the receivable and customer specific information. Determining appropriate allowances for
these losses is an inherently uncertain process, and ultimate losses may vary from the current
estimates. The allowance for doubtful accounts was $400,000 and $386,000 at June 30, 2011 and
December 31, 2010, respectively.
Note 8: Stock-Based Compensation and Stock Options
In October 2001, the Company granted to each director fully vested and exercisable options to
purchase 30,000 shares of common stock with an exercise price of $2.00 per share for their services
as a director in 2000 and 2001. A total of 210,000 options were granted. The options expire in
October 2011. 150,000 options were exercised during the year ended December 31, 2005, 17,275
options were exercised during the year ended December 31, 2006, 30,000 options were exercised
during the year ended December 31, 2008 and the remaining 12,725 of these options were exercised
during the quarter ended March 31, 2011.
In March 2002, the Company granted to each director options to purchase 5,000 shares of common
stock with an exercise price of $3.00 per share that vested in connection with their services as a
director in 2002. A total of 35,000 options were granted. The options expire in March 2012. In
October 2002, 1,411 options were cancelled upon the resignation of a director, 23,589 options were
exercised during the year ended December 31, 2004, 5,000 options were exercised during the year
ended December 31, 2008 and the remaining 5,000 of these options were exercised during the quarter
ended March 31, 2011.
In November 2009, the Company granted to one of its employees options to purchase 300,000
shares of common stock with an exercise price of $14.97. 75,000 options vest and become exercisable
annually starting July 1, 2011. The options expire in November 2019. As of June 30, 2011, none of
the options were vested and 300,000 options were outstanding. Total stock-based compensation for
the three months ended June 30, 2011 and 2010 was $187,000 for each period. Total stock-based
compensation for the six months ended June 30, 2011 and 2010 was $375,000 for each period.
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As of June 30, 2011, there was approximately $2.2 million of unrecognized stock-based
compensation expense related to outstanding stock options. This amount is expected to be recognized
over 3.0 years. The Company used a forfeiture rate of 0% as the Company does not have enough
historical forfeiture data to estimate the forfeiture rate. To the extent the actual forfeiture
rate is different from what we have anticipated, stock-based compensation related to these options
will be different from our expectations.
Note 9: Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted-average number of common
shares outstanding for the period. Diluted net income (loss) per share is computed by adjusting the
weighted-average number of common shares outstanding for the effect of dilutive potential common
shares outstanding during the period. Potential common shares included in the diluted calculation
consist of incremental shares issuable upon the exercise of outstanding stock options calculated
using the treasury stock method.
The following table sets forth the calculation of basic and diluted net income (loss) per
share (in thousands, except per share amounts):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Basic net income (loss) per share: |
||||||||||||||||
Net income (loss) |
$ | 4,918 | $ | 3,247 | $ | (9,037 | ) | $ | 5,721 | |||||||
Weighted average common shares |
16,462 | 16,444 | 16,456 | 16,444 | ||||||||||||
Basic net income (loss) per share |
$ | 0.30 | $ | 0.20 | $ | (0.55 | ) | $ | 0.35 | |||||||
Diluted net income (loss) per share: |
||||||||||||||||
Net income (loss) |
$ | 4,918 | $ | 3,247 | $ | (9,037 | ) | $ | 5,721 | |||||||
Weighted average common shares |
16,462 | 16,444 | 16,456 | 16,444 | ||||||||||||
Effect of dilutive securities: stock options |
123 | 9 | | 8 | ||||||||||||
Diluted weighted average common shares |
16,585 | 16,453 | 16,456 | 16,452 | ||||||||||||
Diluted net income (loss) per share |
$ | 0.30 | $ | 0.20 | $ | (0.55 | ) | $ | 0.35 | |||||||
All dilutive options outstanding as of June 30, 2011 and 2010 were included in the computation
of diluted net income (loss) per share for the three months.
For the six months ended June 30, 2011, options to purchase approximately 300,000 shares
of common stock were not included in the calculation of net loss per share because the effect would
have been anti-dilutive.
For the six months ended June 30, 2010, options to purchase approximately 300,000 shares of
common stock with exercise prices greater than the average fair value of the Companys stock were
not included in the calculation because the effect would have been anti-dilutive.
Note 10: Commitments and Contingencies
The Company leases office space in Canada, France, Germany, Spain, the U.K., and the U.S.
under operating leases which expire between July 31, 2011 and January 31, 2014. The future minimum
lease payments under these operating leases as of June 30, 2011 total $10.6 million. The future
lease payments consist of $2,168,000 due in 2011, $3,482,000 due in 2012, $2,716,000 due in 2013,
$964,000 due in 2014, and $814,000 due in 2015 and $466,000 in 2016.
As discussed above under Note 1, the Company is continuing its program under which it makes
cash payments to people who establish that they were former stockholders of Travelzoo.com
Corporation, and who failed to submit requests to convert their shares into shares of Travelzoo
Inc. within the required time period. The accompanying condensed consolidated financial statements
include a charge in general and administrative expenses of $77,000 for these cash payments for the
three months ended June 30, 2011. The total cost of this program is not reliably estimable because
it is based on the ultimate number of valid requests received and future levels of the Companys
common stock price. The Companys common stock price affects the liability because the amount of
cash payments under the program is based in part on the recent level of the stock price at the date
valid requests are received. The Company does not know how many of the requests for shares
originally received by Travelzoo.com Corporation in 1998 were valid, but the Company believes that
only a portion of such requests were valid. As noted above, in order to receive payment under the
program, a person is required to establish that such person validly held shares in Travelzoo.com
Corporation. Assuming 100% of the requests from 1998 were valid, and
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after taking into account the settlement with the State of Delaware referred to above in Note
1, former stockholders of Travelzoo.com Corporation holding approximately 1.0 million shares had
not submitted claims under the program as of June 30, 2011.
Note 11: Income Taxes
In determining the quarterly provisions for income taxes, the Company uses an estimated annual
effective tax rate which is based on our expected annual income and statutory tax rates in the U.S.
The effective tax rate does not reflect any tax benefits from the losses of our foreign operations.
For the six months ended June 30, 2011, our effective tax rate was (297%). For the six months ended
June 30, 2011, the $20.0 million expense for the settlement with the State of Delaware was treated
as having no recognizable tax benefits.
At June 30, 2011 the Company had approximately $1.5 million in total unrecognized tax
benefits. Unrecognized tax benefits of approximately $156,000 which, if recognized, would favorably
affect the Companys effective income tax rate, and unrecognized tax benefits of approximately $1.2
million which if recognized, would be recorded in discontinued operations.
The Companys policy is to include interest and penalties related to unrecognized tax
positions in income tax expense. As of June 30, 2011 and December 31, 2010, the Company had
approximately $112,000 and $83,000, respectively, in accrued interest related to uncertain tax
positions. The Company has not accrued any penalties related to our uncertain tax positions as we
believe that it is more likely than not that there will not be any assessment of penalties. The
Company files income tax returns in the U.S. federal jurisdiction and various states and foreign
jurisdictions. The Company is subject to U.S. federal and certain state tax examinations for years
after 2006 and is subject to California tax examinations for years after 2005.
Note 12: Segment Reporting and Significant Customer Information
The Company manages its business geographically and has two reportable operating segments:
North America and Europe. North America consists of the Companys operations in Canada and the U.S.
Europe consists of the Companys operations in France, Germany, Spain, and the U.K.
Management relies on an internal management reporting process that provides revenue and
segment operating income (loss) for making financial decisions and allocating resources. Management
believes that segment revenues and operating income (loss) are appropriate measures of evaluating
the operational performance of the Companys segments.
The following is a summary of operating results from continuing operations and assets (in
thousands) by business segment:
North | ||||||||||||||||||||
Three months ended June 30, 2011: | America | Europe | Other | Elimination | Consolidated | |||||||||||||||
Revenues from unaffiliated customers |
$ | 27,588 | $ | 9,977 | $ | | $ | | $ | 37,565 | ||||||||||
Intersegment revenues |
112 | 57 | | (169 | ) | | ||||||||||||||
Total net revenues |
27,700 | 10,034 | | (169 | ) | 37,565 | ||||||||||||||
Operating income |
6,542 | 1,086 | | | 7,628 |
North | ||||||||||||||||||||
Three months ended June 30, 2010: | America | Europe | Other | Elimination | Consolidated | |||||||||||||||
Revenues from unaffiliated customers |
$ | 22,153 | $ | 5,953 | $ | | $ | | $ | 28,106 | ||||||||||
Intersegment revenues |
42 | 55 | | (97 | ) | | ||||||||||||||
Total net revenues |
22,195 | 6,008 | | (97 | ) | 28,106 | ||||||||||||||
Operating income (loss) |
6,743 | (808 | ) | | 1 | 5,936 |
North | ||||||||||||||||||||
Six months ended June 30, 2011: | America | Europe | Other(a) | Elimination | Consolidated | |||||||||||||||
Revenues from unaffiliated customers |
$ | 55,105 | $ | 19,420 | $ | | $ | | $ | 74,525 | ||||||||||
Intersegment revenues |
213 | 61 | | (274 | ) | | ||||||||||||||
Total net revenues |
55,318 | 19,481 | | (274 | ) | 74,525 | ||||||||||||||
Operating income (loss) |
15,794 | 1,827 | (20,000 | ) | | (2,379 | ) |
(a) | Amount represents settlement of State of Delaware unclaimed property review |
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North | ||||||||||||||||||||
Six months ended June 30, 2010: | America | Europe | Other | Elimination | Consolidated | |||||||||||||||
Revenues from unaffiliated customers |
$ | 44,520 | $ | 12,104 | $ | | $ | | $ | 56,624 | ||||||||||
Intersegment revenues |
71 | 65 | | (136 | ) | | ||||||||||||||
Total net revenues |
44,591 | 12,169 | | (136 | ) | 56,624 | ||||||||||||||
Operating income (loss) |
12,853 | (1,758 | ) | | 1 | 11,096 |
North | ||||||||||||||||
As of June 30, 2011: | America | Europe | Elimination | Consolidated | ||||||||||||
Long-lived assets |
$ | 3,624 | $ | 631 | $ | | $ | 4,255 | ||||||||
Total assets |
79,669 | 22,612 | (31,496 | ) | 70,785 |
North | ||||||||||||||||
As of December 31, 2010: | America | Europe | Elimination | Consolidated | ||||||||||||
Long-lived assets |
$ | 4,329 | $ | 154 | $ | | $ | 4,483 | ||||||||
Total assets |
85,658 | 10,490 | (30,146 | ) | 66,002 |
Revenue for each segment is recognized based on the customer location within a designated
geographic region. Property and equipment are attributed to the geographic region in which the
assets are located.
For the three and six months ended June 30, 2011 and 2010, the Company did not have any
customers that accounted for 10% or more of revenue. As of June 30, 2011 and December 31, 2010, the
Company did not have any customers that accounted for 10% or more of accounts receivable.
Note 13: Comprehensive Income (Loss)
Comprehensive income (loss) consists of two components, net income (loss) and other
comprehensive income (loss). Other comprehensive income (loss) refers to gains or losses that under
generally accepted accounting principles are recorded as an element of stockholders equity but are
excluded from net income (loss). The Companys other comprehensive income (loss) is comprised of
foreign currency translation adjustments.
The following are components of comprehensive income (loss) (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) |
$ | 4,918 | $ | 3,247 | $ | (9,037 | ) | $ | 5,721 | |||||||
Other comprehensive income(loss): |
||||||||||||||||
Foreign currency translation adjustments |
$ | (18 | ) | $ | (184 | ) | $ | 203 | $ | (58 | ) | |||||
Total comprehensive income (loss) |
$ | 4,900 | $ | 3,063 | $ | (8,834 | ) | $ | 5,663 | |||||||
Note 14: Related Party Transaction
In July 2010, the Company entered into an independent contractor agreement with Holger Bartel,
the Companys former Chief Executive Officer, the Companys Chairman and brother of Ralph Bartel,
who controls the Company, to provide consulting services. Fees for these services rendered during
the quarter ended June 30, 2011 totaled approximately $104,000.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The information in this report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such statements are based upon current expectations, assumptions,
estimates and projections about Travelzoo and our industry. These forward-looking statements are
subject to the many risks and uncertainties that exist in our operations and business environment
that may cause actual results, performance or achievements of Travelzoo to be different from those
expected or anticipated in the forward-looking statements. Any statements contained herein that are
not statements of historical fact may be deemed to be forward-looking statements. For example,
words such as may, will, should, estimates, predicts, potential, continue,
strategy, believes, anticipates, plans, expects, intends, and similar expressions are
intended to identify forward-looking statements. Travelzoos actual results and the timing of
certain events could differ significantly from those anticipated in such forward-looking
statements. Factors that might cause or contribute to such a
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discrepancy include, but are not
limited to, those discussed elsewhere in this report in the section entitled Risk Factors and the
risks
discussed in our other SEC filings. The forward-looking statements included in this report
reflect the beliefs of our management on the date of this report. Travelzoo undertakes no
obligation to update publicly any forward-looking statements for any reason, even if new
information becomes available or other circumstances occur in the future.
Overview
Travelzoo Inc. (the Company, or Travelzoo) is a global Internet media company. We inform
over 23 million subscribers in North America, Europe and Asia
Pacific, as well as millions of website users, about the best travel
and entertainment deals available from thousands of companies. Our deal experts source, research
and test-book offers, recommending only those that meet Travelzoos rigorous quality standards. We
provide travel companies, entertainment companies and local businesses with a fast, flexible, and
cost-effective way to reach millions of consumers. Our revenues are generated primarily from
advertising fees. In Asia Pacific, the Travelzoo business is operated by Travelzoo (Asia) Ltd. and Travelzoo
Japan K.K. under a License agreement with Travelzoo Inc.
Our publications and products include the Travelzoo websites (www.travelzoo.com,
www.travelzoo.ca, www.travelzoo.co.uk, www.travelzoo.de, www.travelzoo.es, www.travelzoo.fr, among
others), the Travelzoo Top 20 e-mail newsletter, and the Newsflash e-mail alert service. We operate
SuperSearch, a pay-per-click travel search tool, and the Travelzoo Network, a network of
third-party websites that list deals published by Travelzoo. We also operate Fly.com, a travel
search engine that allows users to quickly and easily find the best prices on flights from hundreds
of airlines and online travel agencies. In August 2010, we launched Local Deals, a new service that
allows our subscribers to purchase vouchers for deals from local businesses such as spas and
restaurants through the Travelzoo website. Vouchers are redeemable at the local businesses during
the promotional period. We receive a percentage of the face value of the voucher from the local
businesses.
On October 31, 2009, we completed the sale of our Asia Pacific operating segment to Azzurro
Capital Inc. and its wholly-owned subsidiaries, Travelzoo (Asia) Limited and Travelzoo Japan K.K.
We have not had significant ongoing involvement with the operations of the Asia Pacific operating
segment and have not had material economic interests in the Asia Pacific operating segment since
the completion of the sale. Starting November 1, 2009, the Travelzoo websites in Asia Pacific
(cn.travelzoo.com, www.travelzoo.co.jp, www.travelzoo.com.au, www.travelzoo.com.hk,
www.travelzoo.com.tw, among others), the Travelzoo Top 20 e-mail newsletters in Asia Pacific and
the Newsflash e-mail alert service in Asia Pacific have been published by Travelzoo (Asia) Limited
and Travelzoo Japan K.K., under a license agreement with the Company.
There is a reciprocal revenue-sharing agreement among the entities operating the Travelzoo
business in Asia Pacific and the Company related to cross-selling
audiences, channels and offers. More than 2,000 companies use
our services, including American Airlines, Avis Rent A Car, British Airways, Harrahs
Entertainment, Expedia, Fairmont Hotels and Resorts, Interstate Hotels & Resorts, JetBlue Airways,
Kimpton Hotels, Liberty Travel, Marriott Hotels, Royal Caribbean, Spirit Airlines, Starwood Hotels
& Resorts Worldwide, United Airlines, and Virgin Atlantic.
Our revenues are primarily advertising revenues, consisting principally of listing fees paid
by travel companies, entertainment companies and local businesses to advertise their offers on
Travelzoos media properties. Listing fees are based on audience reach, placement, number of
listings, number of impressions, number of click-throughs, number of referrals or percentage of the
face value of vouchers sold. Insertion orders are typically for periods between one month and
twelve months and are not automatically renewed. Merchant agreements for Local Deals advertisers
are typically for the period of the voucher redemption period.
We have two operating segments based on geographic regions: North America and Europe. North
America consists of our operations in Canada and the U.S. Europe consists of our operations in
France, Germany, Spain, and the U.K. For the quarter ended June 30, 2011, European operations were
27% of revenues. Financial information with respect to our business segments and certain financial
information about geographic areas appears in Note 12 to the accompanying consolidated financial
statements.
When evaluating the financial condition and operating performance of the Company, management
focuses on the following financial and non-financial indicators:
| Growth in the number of subscribers to the Companys newsletters and page views of the homepages of the Travelzoo websites; |
| Operating margin; |
| Growth in revenues in the absolute and relative to the growth in reach of the Companys publications; and |
| Revenue per employee as a measure of productivity. |
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Critical Accounting Policies
We believe that there are a number of accounting policies that are critical to understanding
our historical and future performance, as
these policies affect the reported amounts of revenue and the more significant areas involving
managements judgments and estimates. These significant accounting policies relate to revenue
recognition, the allowance for doubtful accounts, and liabilities to former stockholders. These
policies, and our procedures related to these policies, are described in detail below.
Revenue Recognition
We recognize revenue on arrangements in accordance with the SEC Staff Accounting Bulletin for
revenue recognition. We recognize advertising revenues in the period in which the advertisement is
displayed, provided that evidence of an arrangement exists, the fees are fixed or determinable and
collection of the resulting receivable is reasonably assured. If fixed-fee advertising is displayed
over a term greater than one month, revenues are recognized ratably over the period as described
below. The majority of insertion orders have terms that begin and end in a quarterly reporting
period. In the cases where at the end of a quarterly reporting period the term of an insertion
order is not complete, the Company allocates the total arrangement fee to each element based on the
relative estimated selling price of each element. The Company recognizes revenue for the period
based on elements delivered during the period. The Company uses prices stated on its internal rate
card, which represents stand-alone sales prices, to establish estimated selling prices. The
stand-alone price is the price that would be charged if the advertiser purchased only the
individual insertion. Fees for variable-fee advertising arrangements are recognized based on the
number of impressions displayed, number of clicks delivered, or number of referrals generated
during the period.
Under these policies, no revenue is recognized unless persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, and collection is deemed
reasonably assured. The Company evaluates each of these criteria as follows:
| Evidence of an arrangement. We consider an insertion order signed by the client or its agency to be evidence of an arrangement. |
| Delivery. Delivery is considered to occur when the advertising has been displayed and, if applicable, the click-throughs have been delivered. |
| Fixed or determinable fee. We consider the fee to be fixed or determinable if the fee is not subject to refund or adjustment and payment terms are standard. |
| Collection is deemed reasonably assured. Collection is deemed reasonably assured if we expect that the client will be able to pay amounts under the arrangement as payments become due. If we determine that collection is not reasonably assured, then we defer the revenue and recognize the revenue upon cash collection. Collection is deemed not reasonably assured when a client is perceived to be in financial distress, which may be evidenced by weak industry conditions, a bankruptcy filing, or previously billed amounts that are past due. |
Revenue from advertising sold to clients through agencies is reported at the net amount billed
to the agency.
Revenue from the sale of vouchers through our Local Deals service is reported on a net basis
as the Company is acting as an agent in these transactions. The Company applies a return allowance for potential voucher refunds based on its historical experience.
Allowance for Doubtful Accounts
We record a provision for doubtful accounts based on our historical experience of write-offs
and a detailed assessment of our accounts receivable and allowance for doubtful accounts. In
estimating the provision for doubtful accounts, management considers the age of the accounts
receivable, our historical write-offs, the creditworthiness of the client, the economic conditions
of the clients industry, and general economic conditions, among other factors. Should any of these
factors change, the estimates made by management will also change, which could impact the level of
our future provision for doubtful accounts. Specifically, if the financial condition of our clients
were to deteriorate, affecting their ability to make payments, additional provision for doubtful
accounts may be required.
Liability to Former Stockholders
The Company is continuing its program under which it makes cash payments to people who
establish that they were former stockholders of Travelzoo.com Corporation, and who failed to submit
requests to convert their shares into shares of Travelzoo Inc. within the required time period. We
account for the cost of this program as an expense recorded in general and administrative expenses.
The ultimate total cost of this program is not reliably estimable because it is based on the
ultimate number of valid requests received and future levels of the Companys common stock price.
The Companys common stock price affects the liability because the amount of cash payments under
the program is based in part on the recent level of the stock price at the date valid requests are
received. We do not know how many of the requests for shares originally received by Travelzoo.com
Corporation in 1998 were valid. We believe that only a portion of such requests were valid. In
order to receive payment under the program, a person is required to establish that such person
15
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validly held shares in Travelzoo.com Corporation.
Since the total cost of the program is not reliably estimable, the amount of expense recorded
in a period is equal to the number of actual claims received during the period multiplied by (i)
the number of shares held by each individual former stockholder and (ii) the applicable settlement
price based on the recent price of our common stock at the date the claim is received as stipulated
by the program. Requests are generally paid within 30 days of receipt. Please refer to Note 10 to
our unaudited condensed consolidated financial statements for further details about potential
liabilities to former stockholders.
Results of Operations
The following table sets forth, as a percentage of total revenues, the results from our
operations for the periods indicated.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of revenues |
6.7 | 5.7 | 6.6 | 5.8 | ||||||||||||
Gross profit |
93.3 | 94.3 | 93.4 | 94.2 | ||||||||||||
Operating expenses: |
||||||||||||||||
Sales and marketing |
50.9 | 50.0 | 47.4 | 51.3 | ||||||||||||
General and administrative |
22.1 | 23.1 | 22.4 | 23.3 | ||||||||||||
Settlement with State of |
||||||||||||||||
Delaware |
| | 26.8 | | ||||||||||||
Total operating expenses |
73.0 | 73.1 | 96.6 | 74.6 | ||||||||||||
Income (loss) from operations |
20.3 | 21.2 | (3.2 | ) | 19.6 | |||||||||||
Other income and expenses, net |
0.1 | 0.1 | 0.1 | (0.2 | ) | |||||||||||
Income (loss) before income taxes |
20.4 | 21.3 | (3.1 | ) | 19.4 | |||||||||||
Income taxes |
7.3 | 9.7 | 9.1 | 9.3 | ||||||||||||
Net income (loss) |
13.1 | % | 11.6 | % | (12.2 | )% | 10.1 | % | ||||||||
For the three months ended June 30, 2011, we reported income from operations of approximately
$7.6 million. Our operating margin decreased to 20.3% for the three months ended June 30, 2011
compared to 21.2% for the same period last year. The main reason for the decrease in operating
margin is our cost of revenue as a percentage of revenues for the three months ended June 30, 2011
increased compared to the three months ended June 30, 2010 (see Cost of Revenue below).
For the six months ended June 30, 2011, we reported loss from operations of approximately $2.4
million, which included a non-recurring expense item of $20.0 million related to the settlement of
the State of Delaware unclaimed property review. Our operating margin decreased to 3.2% for the six
months ended June 30, 2011 compared to 19.6% for the same period last year. The main reasons for
the decrease in operating margin is the non-recurring $20.0 million expense related to the
settlement of the State of Delaware unclaimed property review
We do not know what our sales and marketing expenses as a percentage of revenues will be in
future periods. Increased competition in our industry may require us to increase advertising for
our brand and for our products. Increases in the average cost of acquiring new subscribers (see
Subscriber Acquisition below) may result in an increase of sales and marketing expenses as a
percentage of revenues. We may decide to accelerate our subscriber acquisition for various
strategic and tactical reasons and, as a result, increase our marketing expenses. We may see a
unique opportunity for a brand marketing campaign that will result in an increase of marketing
expenses. Further, our strategy to replicate our business model in selected foreign markets (see
Growth Strategy below) may result in a significant increase in our sales and marketing expenses
and have a material adverse impact on our results of operations. We expect fluctuations of sales
and marketing expenses as a percentage of revenues from quarter to quarter. Some of the
fluctuations may be significant and have a material impact on our results of operations.
We do not know what our general and administrative expenses as a percentage of revenues will
be in future periods. There may be fluctuations that have a material impact on our results of
operations. We expect our headcount to continue to increase in the future. The Companys headcount
is one of the main drivers of general and administrative expenses. Therefore, we expect our
absolute general and administrative expenses to continue to increase. In addition, we expect our
expansion into foreign markets to result in a significant additional increase in our general and
administrative expenses. Our general and administrative expenses as a percentage of revenues may
also fluctuate depending on the number of requests received related to a program under which the
Company intends to make cash payments to people who establish that they were former stockholders of
Travelzoo.com Corporation, and who failed to submit requests
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to convert their shares into shares of
Travelzoo Inc. within the required time period.
Reach
The following table sets forth the number of subscribers of each of our e-mail publications in
North America and Europe as of June 30, 2011 and 2010 and the total number of page views for the
homepages of the Travelzoo websites in North America and Europe for the six months ended June 30,
2011 and 2010. Management considers the page views for the Travelzoo homepages as indicators for
the growth of website traffic. Management reviews these non-financial metrics for two reasons:
First, to monitor our progress in increasing the reach of our products. Second, to evaluate whether
we are able to convert higher reach into higher revenues.
June 30, | Year-over-Year | |||||||||||
2011 | 2010 | Change | ||||||||||
Subscribers: |
||||||||||||
North America
Travelzoo Top 20 |
14,482,000 | 13,452,000 | 8 | % | ||||||||
Newsflash |
13,010,000 | 11,778,000 | 10 | % | ||||||||
Europe
Travelzoo Top 20 |
5,272,000 | 4,137,000 | 27 | % | ||||||||
Newsflash |
5,225,000 | 4,064,000 | 29 | % |
Six Months Ended June 30, | Year-over-Year | |||||||||||
2011 | 2010 | Change* | ||||||||||
Page views of homepages of Travelzoo websites: |
||||||||||||
North America |
20,482,000 | 20,611,000 | (1 | )% | ||||||||
Europe |
11,687,000 | 8,617,000 | 36 | % |
* | The comparability of year-over-year changes of page views of the homepages of Travelzoo websites may be limited due to the design and navigation of the websites. |
In North America, revenues for the six months ended June 30, 2011 increased by 24% from the
same period last year. The total number of subscribers in North America to the Travelzoo Top 20
e-mail newsletter as of June 30, 2011 increased by 8% compared to June 30, 2010 and page views of
the homepages of the Travelzoo websites in North America for the six months ended June 30, 2011
decreased by 1% from the same period last year. In North America, revenues increased at a higher
rate of growth than the rate of growth in subscribers to the Travelzoo Top 20 e-mail newsletter,
despite the decline in page views of the homepages of the
Travelzoo websites in North America, primarily due to our Local Deals service.
In Europe, revenues for the six months ended June 30, 2011 increased by 60% from the same
period last year. The total number of subscribers in Europe to the Travelzoo Top 20 e-mail
newsletter as of June 30, 2011 increased by 27% compared to June 30, 2010 and page views of the
homepages of the Travelzoo websites in Europe increased by 36% from the same period last year. In
Europe, revenues increased at a higher rate than the rate of growth in subscribers to the Travelzoo
Top 20 e-mail newsletter and the rate of growth in page views of the homepages of the Travelzoo
websites in Europe due in part to increases in our advertising rates.
Revenues
Our total revenues increased to $37.6 million for the three months ended June 30, 2011 from
$28.1 million for the three months ended June 30, 2010. This represents an increase of $9.5 million
or 34%. Revenue from our operations in North America increased by $5.2 million, or 25%
year-over-year, which was primarily due to a $5.3 million increase in revenues from our
publications, including the Travelzoo website, the Top 20 e-mail newsletter, the Newsflash e-mail
alert service, and the Local Deals e-mail alert service. Revenue from our operations in Europe
increased by $4.0 million, or 67% year-over-year, which was attributed primarily to a $3.7 million
increase in revenue from our publications, including the Travelzoo website, the Top 20 e-mail
newsletter, the Newsflash e-mail alert service and the Local Deals e-mail alert service. In local
currency terms, revenues from our operations in Europe increased 53% year-over-year. The
strengthening of the U.S. dollar relative to the British Pound Sterling and the Euro in the three
months ended June 30, 2011 compared to the three months ended June 30, 2010 had a favorable impact
on the revenues from our operations in Europe. Had foreign exchange rates remained constant in
these periods, revenues from our operations in Europe for the three months ended June 30, 2011
would have been approximately $958,000 lower than reported revenues of $10.0 million.
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Our total revenues increased to $74.5 million for the six months ended June 30, 2011 from
$56.6 million for the six months ended June 30, 2010. This represents an increase of $17.9 million
or 32%. $10.7 million of the increase in revenues came from our operations
in North America and was attributed primarily to a $10.5 million increase in revenues from our
publications, which includes the Travelzoo websites, the Top 20 e-mail newsletter, and the
Newsflash e-mail alert service and the Local Deals e-mail alert service. $7.2 million of the
increase in revenues came from our operations in Europe, which had an increase of 60% in revenues
year-over-year, and was attributed primarily to a $7.0 million increase in revenue from our
publications, which includes the Travelzoo websites, the Top 20 e-mail newsletter. In local
currency terms, revenues from our operations in Europe increased 51% year-over-year. The weakening
of the U.S. dollar relative to the British Pound Sterling and the Euro in the six months ended June
30, 2011 compared to the six months ended June 30, 2010 had a favorable impact on the revenues from
our operations in Europe. Had foreign exchange rates remained constant in these periods, revenues
from our operations in Europe for the six months ended June 30, 2010 would have been approximately
$1.1 million lower than reported revenues of $19.5 million.
For the three and six months ended June 30, 2011 and June 30, 2010, none of our customers
accounted for 10% or more of our revenue.
Management believes that our ability to increase revenues in the future depends mainly on the
following factors:
| Our ability to increase our advertising rates; |
| Our ability to sell more advertising to existing clients; |
| Our ability to increase the number of clients; |
| Our ability to develop new revenue streams; |
| Our ability to launch new products; and |
| Our ability to attract and retain merchants who offer compelling deals on their services and our ability to sell vouchers for these deals to consumers. |
We believe that we can increase our advertising rates if the reach of our publications
increases. We do not know if we will be able to increase the reach of our publications. We believe
that we can sell more advertising if the market for online advertising continues to grow and if we
can maintain or increase our market share. We believe that the market for online advertising
continues to grow. We do not know if we will be able to maintain or increase our market share. We
historically have increased the number of clients in every year since inception. We do not know if
we will be able to increase the number of clients in the future. We do not know if we will have
market acceptance of any new products.
Our goal is to increase our advertising rates at least once a year in each market, preferably
as of January 1 of each year. We increased advertising rates on select listings in the U.S. on
January 1, 2011 and 2010 due in part to the increase in the reach of our publications. We increased
advertising rates on select listings in Europe on April 25, 2011, November 1, 2010, May 1, 2010,
and January 1, 2010 due in part to the increase in the reach of our publications. In the U.S. and
Europe, we decided not to increase advertising rates on all listings in 2011 and 2010 due to
intense competition in our industry. We intend to continue reviewing advertising rates and
considering increases once a year as of January 1. However, there is no assurance that we will
increase our advertising rates. Depending on the level of competition in the industry and the
condition of the online advertising market, we may decide not to increase our advertising rates in
all or certain markets.
Average annualized revenue per employee decreased to $438,000 for the three months ended June
30, 2011 from $541,000 for the three months ended June 30, 2010.
Cost of Revenues
Cost of revenues consists primarily of network expenses, including fees we pay for co-location
services and depreciation and maintenance of network equipment, payments made to third-party
partners of the Travelzoo Network, fees we pay related to user searches on Fly.com, amortization of
capitalized website development costs, credit card fees associated with vouchers we sell, and
salary expenses associated with network operations and customer service staff. Our cost of revenues
increased to $2.5 million for the three months ended June 30, 2011 from $1.6 million for the three
months ended June 30, 2010. As a percentage of revenue, cost of revenues increased to 6.7% for the
three months ended June 30, 2011 from 5.7% for the three months ended June 30, 2010. The $883,000
increase in cost of revenues for the three months ended June 30, 2011 compared to the three months
ended June 30, 2010 was primarily due to a $263,000 increase in credit card fees, a $226,000
increase in payments made to third-party partners of the Travelzoo Network, and a
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$148,000 increase
in professional services expense.
Our cost of revenues increased to $4.9 million for the six months ended June 30, 2011 from
$3.3 million for the six months ended June 30, 2010. As a percentage of revenue, cost of revenues
increased to 6.6% for the six months ended June 30, 2011 from 5.8% for the six months ended June
30, 2010. The $1.6 million increase in cost of revenues for the six months ended June 30, 2011
compared to the six months ended June 30, 2010 was primarily due to a $646,000 increase in credit
card fees, a $430,000 increase in payments made to third-party partners of the Travelzoo Network,
and a $240,000 increase in professional services expense.
Operating Expenses
Sales and Marketing
Sales and marketing expenses consist primarily of advertising and promotional expenses, salary
expenses associated with sales, marketing and production staff, expenses related to our
participation in industry conferences, and public relations expenses. Sales and marketing expenses
increased to $19.1 million for the three months ended June 30, 2011 from $14.0 million for the
three months ended June 30, 2010. The goal of our advertising was to acquire new subscribers for
our e-mail products, increase the traffic to our websites, and increase brand awareness for
Travelzoo and Fly.com. The $5.1 million increase in sales and marketing expenses for the three
months ended June 30, 2011 compared to the three months ended June 30, 2010 was primarily due to a
$2.6 million increase in salary and employee related expenses due primarily to an increase in
headcount, a $2.0 million dollar increase in television advertising expense and a $989,000 increase
in advertising to acquire traffic to our Travelzoo website, offset by $671,000 decrease in marketing expense
for Fly.com and a $424,00 decrease in subscriber acquisition expense. For the three months ended
June 30, 2011 and 2010, advertising expenses accounted for 54% and 61%, respectively, of total
sales and marketing expenses.
Sales and marketing expenses increased to $35.3 million for the six months ended June 30, 2011
from $29.0 million for the six months ended June 30, 2010. The $6.3 million increase in sales and
marketing expenses for the six months ended June 30, 2011 compared to the six months ended June 30,
2010 was primarily due to a $4.1 million increase in salary and employee related expenses due
primarily to an increase in headcount, a $2.0 million dollar increase in television advertising
expense and a $842,000 increase in advertising to acquire traffic to our Travelzoo website, offset by a
$741,000 decrease in marketing expenses for Fly.com, and a $573,000 decrease in subscriber
acquisition expense. For the six months ended June 30, 2011 and 2010, advertising expenses
accounted for 53% and 60%, respectively, of total sales and marketing expenses.
Our goal is to increase our revenues from advertising sales. One important factor that drives
our revenues is our advertising rates. We believe that we can increase our advertising rates only
if the reach of our publications increases. In order to increase the reach of our publications, we
have to acquire a significant number of new subscribers in every quarter and continue to promote
our brand. One significant factor that impacts our advertising expenses is the average cost per
acquisition of a new subscriber. We believe that the average cost per acquisition depends mainly on
the advertising rates which we pay for media buys, our ability to manage our subscriber acquisition
efforts successfully, and the degree of competition in our industry.
In May 2005, we began operations in the U.K. In 2006, we began operations in Canada, Germany,
and Spain. In 2007, we began operations in France. The continuing build-up of our business in
Europe is expected to result in a relatively high level of sales and marketing expense in the
foreseeable future.
General and Administrative
General and administrative expenses consist primarily of compensation for administrative,
executive, and software development staff, fees for professional services, rent, bad debt expense,
amortization of intangible assets, and general office expense. General and administrative expenses
increased to $8.3 million for the three months ended June 30, 2011 from $6.5 million for the three
months ended June 30, 2010. The $1.8 million increase in general and administrative expenses was
primarily due to a $725,000 increase in salary and employee related expenses, a $519,000 increase
in rent, office and insurance expense and a $356,000 increase in professional services expense.
General and administrative expenses increased to $16.7 million for the six months ended June
30, 2011 from $13.2 million for the six months ended June 30, 2010. The $3.5 million increase in
general and administrative expenses was primarily due to a $1.0 million increase in rent and
office expense, a $995,000 increase in salary and employee related expenses, and a $932,000
increase in professional services expense.
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In the six months ended June 30, 2011 and 2010, the Company recorded expenses of $100,000 and
$6,000, respectively, related to a
program under which the Company makes cash payments to people who establish that they were
former stockholders of Travelzoo.com Corporation, and who failed to submit requests for shares in
Travelzoo Inc. within the required time period. The expenses are based on the number of actual
valid claims received and the Companys stock price. We cannot reliably estimate future expenses
incurred under this program because it is based on the number of valid requests received and future
levels of the Companys common stock price.
We expect our headcount to increase in the future. The Companys headcount is one of the main
drivers of general and administrative expenses. Therefore, we expect our general and administrative
expenses to continue to increase.
Our strategy to replicate our business model in foreign markets is expected to result in a
significant additional increase in our general and administrative expenses in the foreseeable
future.
Settlement with State of Delaware
On April 21, 2011, the Company entered into an agreement with the State of Delaware resolving
all claims relating to a previously-announced unclaimed property review. The primary issue raised
in the preliminary findings from the review, received by the Company on April 12, 2011, concerned
the shares of Travelzoo which have not been claimed by former shareholders of Travelzoo.com
Corporation following a 2002 merger, as previously disclosed in the companys report on Form 10-K.
In the preliminary findings under the unclaimed property review, up to 3.0 million shares were
identified as demandable under Delaware escheat laws. While the Company continues to take the
position that such shares were issuable only to persons who establish their eligibility as
shareholders, the Company determined that it was in its best interest to promptly resolve all
claims relating to the unclaimed property review. Under the terms of the agreement, the Company
made a $20.0 million cash payment to the State of Delaware on April 27, 2011 and received a
complete release of those claims. The $20.0 million payment was recorded as an expense in the three
months ended March 31, 2011.
Subscriber Acquisition
The table set forth below provides for each quarter in 2009, 2010, and the first two quarters
of 2011, an analysis of our average cost for acquisition of new subscribers for our Travelzoo Top
20 newsletter and our Newsflash e-mail alert service for our North America and Europe operating
segments.
The table includes the following data:
| Average Cost per Acquisition of a New Subscriber: The quarterly cost of consumer marketing programs whose purpose was primarily to acquire new subscribers, divided by total new subscribers added during the quarter. |
| New Subscribers: Total new subscribers who signed up for at least one of our e-mail publications throughout the quarter. This is an unduplicated subscriber number, meaning a subscriber who signed up for two or more of our publications is only counted once. |
| Subscribers Removed From List: Subscribers who were removed from our lists throughout the quarter either as a result of their requesting removal, or based on periodic list maintenance after we determined that the e-mail address was likely no longer valid. |
| Balance: The number of subscribers at the end of the quarter, computed by taking the previous quarters subscriber balance, adding new subscribers during the current quarter, and subtracting subscribers removed from list during the current quarter. |
North America:
Average Cost per | Subscribers | |||||||||||||||
Acquisition of a | New | Removed | ||||||||||||||
Period | New Subscriber | Subscribers | From List | Balance | ||||||||||||
Q1 2009 |
$ | 2.29 | 720,320 | (259,537 | ) | 11,743,526 | ||||||||||
Q2 2009 |
$ | 2.15 | 885,031 | (277,439 | ) | 12,351,118 | ||||||||||
Q3 2009 |
$ | 1.80 | 1,076,367 | (418,417 | ) | 13,009,068 | ||||||||||
Q4 2009 |
$ | 1.61 | 619,831 | (380,626 | ) | 13,248,273 | ||||||||||
Q1 2010 |
$ | 1.89 | 1,009,235 | (434,754 | ) | 13,822,754 | ||||||||||
Q2 2010 |
$ | 1.62 | 719,777 | (492,527 | ) | 14,050,004 | ||||||||||
Q3 2010 |
$ | 1.60 | 804,892 | (689,727 | ) | 14,165,169 | ||||||||||
Q4 2010 |
$ | 1.14 | 540,703 | (432,071 | ) | 14,273,801 | ||||||||||
Q1 2011 |
$ | 1.74 | 879,185 | (334,491 | ) | 14,818,495 | ||||||||||
Q2 2011 |
$ | 1.16 | 826,846 | (378,548 | ) | 15,266,793 |
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Europe:
Average Cost per | Subscribers | |||||||||||||||
Acquisition of a | New | Removed | ||||||||||||||
Period | New Subscriber | Subscribers | From List | Balance | ||||||||||||
Q1 2009 |
$ | 3.09 | 295,450 | (40,542 | ) | 2,477,583 | ||||||||||
Q2 2009 |
$ | 2.74 | 408,026 | (52,491 | ) | 2,833,118 | ||||||||||
Q3 2009 |
$ | 3.53 | 541,509 | (99,396 | ) | 3,275,231 | ||||||||||
Q4 2009 |
$ | 3.97 | 443,280 | (117,519 | ) | 3,600,992 | ||||||||||
Q1 2010 |
$ | 3.65 | 478,518 | (117,617 | ) | 3,961,893 | ||||||||||
Q2 2010 |
$ | 4.31 | 400,549 | (116,273 | ) | 4,246,169 | ||||||||||
Q3 2010 |
$ | 2.90 | 423,310 | (144,895 | ) | 4,524,584 | ||||||||||
Q4 2010 |
$ | 3.30 | 310,378 | (220,941 | ) | 4,614,021 | ||||||||||
Q1 2011 |
$ | 3.14 | 629,720 | (118,382 | ) | 5,125,359 | ||||||||||
Q2 2011 |
$ | 2.26 | 438,720 | (98,048 | ) | 5,466,031 |
In North America, we noted a trend of decreasing average cost per acquisition of a new
subscriber (CPA) in 2009 after a period of increasing CPA and a decrease in CPA in the second,
third quarters and fourth quarter of 2010 from the first quarter of 2010. We do not consider the
decreases in CPA to be indicative of a longer-term trend or to indicate that our CPA is likely to
stay at this level or is likely to decrease further.
In Europe, we see a large fluctuation in the CPA. The CPA fluctuates from quarter to quarter
and from country to country. The decrease in CPA in the third quarter of 2010 from the second
quarter of 2010 is in part due to an improved method of subscriber acquisition. We do not consider
this decrease in CPA to be indicative of a longer-term trend or to indicate that our CPA is likely
to stay at this level or is likely to decrease further.
Future increases in CPA are likely to result in higher absolute marketing expenses and
potentially higher relative marketing expenses as a percentage of revenue. Going forward, we expect
continued upward pressure on online advertising rates and continued activity from competitors,
which will likely increase our CPA over the long term. The effect on operations is that greater
absolute and relative marketing expenditures may be necessary to continue to grow the reach of our
publications. However, it is possible that the factors driving subscriber acquisition cost
increases can be partially or completely offset by new or improved methods of subscriber
acquisition using techniques which are under evaluation.
Segment Information
We have presented the business segments in this report based on our organizational structure
as of June 30, 2011.
North America
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Net revenues |
$ | 27,700 | $ | 22,195 | $ | 55,318 | $ | 44,591 | ||||||||
Income from operations |
6,542 | 6,743 | 15,794 | 12,854 | ||||||||||||
Income from operations as a % of revenues |
23.6 | % | 30.4 | % | 28.6 | % | 28.8 | % |
In North America, revenues increased $5.5 million, or 25%, for the three months ended June 30,
2011 compared to the same period in 2010 (see Revenues above). Sales and marketing expense
increased to $13.4 million, or 48% of revenue, for the three months ended June 30, 2011 from $9.5
million, or 43% of revenue for the three months ended June 30, 2010. The $3.9 million increase in
sales and marketing expense was primarily due to a $2.0 million dollar increase in television
advertising expense, a $1.5 million increase in salary and employee related expenses due primarily
to an increase in headcount, and a $545,000 increase in advertising to acquire traffic to our
websites, offset by $591,000 decrease in marketing expense for Fly.com. General and administrative
expenses increased to $5.8 million, or 21% of revenue, for the three months ended June 30, 2011
from $4.6 million, or 21% of revenue, for the three months ended June 30,
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2010. The $1.2 million increase in general and administrative expense was primarily due
to a $492,000 increase in salary and employee related expenses, a $338,000 increase in rent,
office and insurance expense and a $298,000 increase in professional services expense. Income from
operations for North America as a percentage of revenue for the three months ended June 30, 2011
compared to the three months ended June 30, 2010 decreased to 23.6% from 30.4%.
In North America, revenues increased $10.7 million, or 24%, for the six months ended June 30,
2011 compared to the same period in 2010 (see Revenues above). Sales and marketing expense
increased to $23.7 million, or 43% of revenue, for the six months ended June 30, 2011 from $19.8
million, or 44% of revenue, for the six months ended June 30, 2010. The $3.9 million increase in
sales and marketing expense was primarily due to a $2.4 million increase in salary and employee
related expenses due primarily to an increase in headcount, a $2.0 million dollar increase in
television advertising expense, offset by a $741,000 decrease in marketing expenses for Fly.com,
and a $523,000 decrease in subscriber acquisition expense. General and administrative expenses
increased to $11.7 million, or 21% of revenue, for the six months ended June 30, 2011 from $9.2
million, or 21% of revenue, for the six months ended June 30, 2010. The $2.5 million increase in
general and administrative expense was primarily due to a $866,000 increase in salary and employee
related expenses due in part to an increase in headcount, a $738,000 increase in professional
services expense and a $605,000 increase in rent, office and insurance expenses. Income from
operations for North America as a percentage of revenue for the six months ended June 30, 2011
compared to the six months ended June 30, 2010 decreased to 28.6% from 28.8%.
Europe
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Net revenues |
$ | 10,034 | $ | 6,008 | $ | 19,481 | $ | 12,169 | ||||||||
Income (loss) from operations |
1,086 | (808 | ) | 1,827 | (1,757 | ) | ||||||||||
Income (loss) from operations as a % of revenues |
10.8 | % | (13.4 | )% | 9.4 | % | (14.4 | )% |
In Europe, revenues increased $4.0 million, or 67%, for the three months ended June 30, 2011
compared to the same period in 2010 (see Revenues above). Sales and marketing expenses increased
to $5.8 million, or 58% of revenue, for the three months ended June 30, 2011 from $4.5 million, or
75% of revenue, for the three months ended June 30, 2010. The $1.3 million increase in sales and
marketing expense was primarily due to a $1.1 million increase in salary and employee related
expenses due primarily to an increase in headcount, a $444,000 increase in advertising to acquire
traffic to our websites, offset by a $277,000 decrease in subscriber acquisition expense. General
and administrative expenses increased to $2.7 million, or 27% of revenue, for the three months
ended June 30, 2011 from $2.0 million, or 33% of revenue, for the three months ended June 30, 2010.
The $673,000 increase in general and administrative expenses was primarily due to a $233,000
increase in salary and employee related expenses due in part to an increase in headcount and a
$181,000 increase in rent, office and insurance expense. Our income from operations in Europe was
$1.1 million for the three months ended June 30, 2011 compared to a loss from operations of
$808,000 for the three months ended June 30, 2010. The weakening of the U.S. dollar relative to the
British Pound Sterling had a favorable impact on the income from our operations in Europe. Had
foreign exchange rates remained constant in these periods, the income from our operations in Europe
for the three months ended June 30, 2011 would have been approximately $52,000 lower.
In Europe, revenues increased $7.3 million, or 60%, for the six months ended June 30, 2011
compared to the same period in 2010 (see Revenues above). Sales and marketing expenses increased
to $11.6 million, or 60% of revenue, for the six months ended June 30, 2011 from $9.3 million, or
76% of revenue, for the six months ended June 30, 2010. The $2.3 million increase in sales and
marketing expense was primarily due to a $1.7 million increase in salary and employee related
expenses due primarily to an increase in headcount and a $658,000 increase in advertising to
acquire traffic to our websites. General and administrative expenses increased to $5.2 million, or
27% of revenue, for the six months ended June 30, 2010 from $4.1 million, or 34% of revenue, for
the six months ended June 30, 2010. The $1.1 million increase in general and administrative expense
was primarily due to a $434,000 increase in rent and office expense, a $194,000 increase in
professional services expenses and a $130,000 increase in salary and employee related expenses. Our
income from operations in Europe was $1.8 million for the six months ended June 30, 2011 compared
to a loss of $1.8 million for the six months ended June 30, 2010. Had foreign exchange rates
remained constant in these periods, the income from our operations in Europe for the six months
ended June 30, 2011 would have been approximately $128,000 lower.
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Income Taxes
Our income is generally taxed in the U.S. and our income tax provisions reflect federal and
state statutory rates applicable to our levels of income and expenses, adjusted to take into
account expenses that are treated as having no recognizable tax benefit. We recorded income tax
provisions of $2.8 million and $2.7 million for the three months ended June 30, 2011 and June 30,
2010, respectively. For the three months ended June 30, 2011 and 2010, our effective tax rates were
36% and 46%, respectively. We recorded income tax provisions of $6.8 million and $5.3 million for
the six months ended June 30, 2011 and June 30, 2010, respectively. For the six months ended June
30, 2011 and 2010, our effective tax rates were (297)% and 48%, respectively. For the six months
ended June 30, 2011, the $20.0 million expense for the settlement with the State of Delaware was
treated as having no recognizable tax benefit.
We expect that our effective tax rate in future periods may fluctuate depending on the total
amount of expenses representing payments to former stockholders, from losses or gains incurred by
our operations in Canada and Europe and corresponding U.S. tax credits, if any.
We file income tax returns in the U.S. federal jurisdiction and various states and foreign
jurisdictions. We are subject to U.S. federal and certain state tax examinations for years after
2006 and are subject to California tax examinations for years after 2005.
Liquidity and Capital Resources
As of June 30, 2011, we had $40.1 million in cash and cash equivalents. Cash and cash
equivalents decreased from $41.2 million as of December 31, 2010 primarily as a result of cash used
by operating and investing activities as explained below. As discussed above, on April 27, 2011, we
made a $20.0 million payment to the State of Delaware related to the settlement of an unclaimed
property review. We expect that cash on hand will be sufficient to provide for working capital
needs for at least the next 12 months.
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Net cash provided by (used in) operating activities |
$ | (582 | ) | $ | 12,049 | |||
Net cash used in investing activities |
(1,056 | ) | (751 | ) | ||||
Net cash provided by financing activities |
308 | 1,073 | ||||||
Effect of exchange rate changes on cash and cash equivalents |
232 | (272 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
$ | (1,098 | ) | $ | 12,099 | |||
Net cash provided by or used in operating activities is net income adjusted for certain
non-cash items and changes in assets and liabilities. Net cash used in operating activities for the
six months ended June 30, 2011 increased by $12.6 million compared to the six months ended June 30,
2010. The $12.6 million increase in cash used in operating activities was due primarily to a $14.8
million decrease in net income due primarily to a $20.0 million settlement to the State of Delaware
related to an unclaimed property review, and a $7.7 million decrease in our income tax receivable,
offset by a $11.4 million increase in accounts payable and accrued expenses for the six months
ended June 30, 2011 compared to the same period in 2010.
Net cash used in investing activities was $1.1 million for the six months ended June 30, 2011
compared to $751,000 for the six months ended June 30, 2010. The $305,000 increase in cash used in
investing activities was due primarily to a $305,000 increase in purchases of property and
equipment.
Net cash provided by financing activities was $308,000 for the six months ended June 30, 2011
compared to $1.1 million for the six months ended June 30, 2010. For the six months ended June 30,
2011, net cash provided by financing activities was due to proceeds from the exercise of stock
options and the excess tax benefit from exercise of stock options. For the six months ended June
30, 2010, net cash provided by financing activities was due to proceeds received from sale of our
Asia Pacific business segment.
Our capital requirements depend on a number of factors, including market acceptance of our
products and services, the amount of our resources we devote to the development of new products,
cash payments to former stockholders of Travelzoo.com Corporation, expansion of our operations, and
the amount of resources we devote to promoting awareness of the Travelzoo and Fly.com brands. Since
the inception of the program under which we make cash payments to people who establish that they
were former stockholders of Travelzoo.com Corporation, and who failed to submit requests to convert
their shares into shares of Travelzoo Inc. within the required time period, we have incurred
expenses of $2.8 million. While future payments for this program are expected to decrease, the
total cost
of this program is still undeterminable because it is dependent on our stock price and on the
number of valid requests ultimately received.
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Consistent with our growth, we have experienced
substantial increases in our cost of revenues, sales and marketing expenses and our general and
administrative expenses, and we anticipate that these increases will continue for the foreseeable
future. We believe cash on hand will be sufficient to pay such costs for at least the next twelve-
months. In addition, we will continue to evaluate possible investments in businesses, products and
technologies, the consummation of any of which would increase our capital requirements.
Although we currently believe that we have sufficient capital resources to meet our
anticipated working capital and capital expenditure requirements for at least the next 12 months,
unanticipated events and opportunities or a less favorable than expected development of our
business in Europe may require us to sell additional equity or debt securities or establish new
credit facilities to raise capital in order to meet our capital requirements.
If we sell additional equity or convertible debt securities, the sale could dilute the
ownership of our existing stockholders. If we issue debt securities or establish a new credit
facility, our fixed obligations could increase, and we may be required to agree to operating
covenants that would restrict our operations. We cannot be sure that any such financing will be
available in amounts or on terms acceptable to us.
The following summarizes our principal contractual commitments as of June 30, 2011 (in
thousands):
2011 | 2012 | 2013 | 2014 | 2015 | 2016 | Total | ||||||||||||||||||||||
Operating leases |
$ | 2,168 | $ | 3,482 | $ | 2,716 | $ | 964 | $ | 814 | $ | 466 | $ | 10,610 | ||||||||||||||
Purchase obligations |
1,125 | 689 | 14 | | | | 1,828 | |||||||||||||||||||||
Total commitments |
$ | 3,293 | $ | 4,171 | $ | 2,730 | $ | 964 | $ | 814 | $ | 466 | $ | 12,438 | ||||||||||||||
We also have contingencies related to net unrecognized tax benefits of approximately $1.5
million as of June 30, 2011. We are unable to make reasonably reliable estimates on the timing of
the cash settlements with the respective taxing authorities.
Growth Strategy
Our growth strategy has two main elements:
| International expansion: We want to grow our revenue and operating profit through replicating the Travelzoo business in attractive international markets in Europe and in North America. We want to develop a strong competitive position through building a strong global brand and unique global content. | ||
| Expand scope of the Travelzoo business: We want to grow our revenue and operating profit through expanding the Travelzoo product offerings and content into entertainment and lifestyle (e.g., Broadway shows, sporting events, restaurants and spas). |
We launched the Travelzoo business in the U.K. in 2005, in Canada in 2006, in Germany in 2006,
in France in 2007, and in Spain in 2008. We began developing and offering entertainment content and
related advertising services in 2008. We launched Fly.com in February 2009. We launched Local Deals
in August 2010.
Recent Accounting Standards
In October 2009, the FASB issued ASU 2009-13, a new accounting standard update for revenue
recognition with multiple deliverables. The new accounting standard update defines when individual
deliverables included in a multiple-element arrangement may be treated as separate units of
accounting. The update primarily provides two significant changes: 1) it eliminates the need for
objective and reliable evidence of the fair value for the undelivered element in order for a
delivered item to be treated as a separate unit of accounting, and 2) it eliminates the residual
method to allocate the arrangement consideration. In addition, the update also expands the
disclosure requirements for revenue recognition. Effective for us January 1, 2011, we adopted this
new accounting standard. The adoption of this new accounting standard did not have an impact on our
consolidated results of operations or financial condition.
In May 2011, the FASB issued ASU 2010-06, a new accounting standard, which amends the fair value
measurement guidance and includes some enhanced disclosure requirements. The most significant
change in disclosures is an expansion of the information required for Level 3 measurements based on
unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011.
We will adopt this new accounting standard on January 1, 2012 and are currently assessing the
future impact of this new accounting standard on our consolidated results of operations and
financial condition.
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In June 2011, the FASB issued ASU 2011-05, a new accounting standard update, which eliminates the current
option to report other comprehensive income and its components in the statement of stockholders
equity. Instead, an entity will be required to present items of net income and other comprehensive
income in one continuous statement or in two separate, but consecutive, statements. The standard is
effective for fiscal years beginning after December 15, 2011. We will adopt this new standard
effective January 1, 2012 and do not expect the adoption of this new accounting standard will have
a material impact on our consolidated results of operations and financial condition.
RISK FACTORS
Investing in our common stock involves a high degree of risk. Any or all of the risks listed
below as well as other variables affecting our operating results could have a material adverse
effect on our business, our quarterly and annual operating results or financial condition, which
could cause the market price of our stock to decline or cause substantial volatility in our stock
price, in which event the value of your common stock could decline. You should also keep these risk
factors in mind when you read forward-looking statements.
Risks Related to Our Financial Condition and Business Model
We cannot assure you that we will be profitable.
For the six months ended June 30, 2011, we incurred a net loss of $9.0 million. In the year
ended December 31, 2010, we generated a net income of $13.2 million. Although we were profitable in
2010, there is no assurance that we will continue to be profitable in the future. We forecast our
future expense levels based on our operating plans and our estimates of future revenues. We may
find it necessary to significantly accelerate expenditures relating to our sales and marketing
efforts or otherwise increase our financial commitment to creating and maintaining brand awareness
among Internet users and travel companies. If our revenues grow at a slower rate than we
anticipate, or if our spending levels exceed our expectations or cannot be adjusted to reflect
slower revenue growth, we may not generate sufficient revenues to be profitable. Although our
operations in Europe generated an operating profit of $1.1 million for the three months ended June
30, 2011, there is no assurance that our operations in Europe will generate an operating income in
the future. Any of these developments could result in a significant decrease in the trading price
of our common stock.
Fluctuations in our operating results may negatively impact our stock price.
Our quarterly and annual operating results may fluctuate significantly in the future due to a
variety of factors that could affect our revenues or our expenses in any particular period. You
should not rely on quarter-to-quarter comparisons of our results of operations as an indication of
future performance. Factors that may affect our quarterly results include:
| mismatches between resource allocation and client demand due to difficulties in predicting client demand in a new market; | ||
| changes in general economic conditions that could affect marketing efforts generally and online marketing efforts in particular; | ||
| the magnitude and timing of marketing initiatives, including our acquisition of new subscribers and our expansion efforts in other regions; | ||
| the introduction, development, timing, competitive pricing and market acceptance of our products and services and those of our competitors; | ||
| our ability to attract and retain key personnel; | ||
| our ability to manage our anticipated growth and expansion; | ||
| our ability to attract traffic to our websites; | ||
| technical difficulties or system downtime affecting the Internet generally or the operation of our products and services specifically; | ||
| payments which we may make to previous stockholders of Travelzoo.com Corporation who failed to submit requests for shares in Travelzoo Inc. within the required time period, or escheat claims related to shares not issued in the Companys merger with Travelzoo.com Corporation; and |
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| volatility of our operating results in new markets. |
We may significantly increase our operating expenses related to advertising campaigns for the
Travelzoo and Fly.com brands for a certain period if we see a unique opportunity for a brand marketing campaign,
if we find it necessary to respond to increased brand marketing by a competitor, or if we decide to
accelerate our acquisition of new subscribers.
If revenues fall below our expectations in any quarter and we are unable to quickly reduce our
operating expenses in response, our operating results would be lower than expected and our stock
price may fall.
Our business model may not be adaptable to a changing market.
Our current revenue model depends on advertising fees paid primarily by travel and
entertainment companies. If current clients decide not to continue advertising their offers with us
and we are unable to replace them with new clients, our business may be adversely affected. To be
successful, we must provide online marketing solutions that achieve broad market acceptance by
travel and entertainment companies. In addition, we must attract sufficient Internet users with
attractive demographic characteristics to our products. It is possible that we will be required to
further adapt our business model in response to changes in the online advertising market or if our
current business model is not successful. If we are not able to anticipate changes in the online
advertising market or if our business model is not successful, our business could be materially
adversely affected.
We may not be able to obtain sufficient funds to grow our business and any additional financing may
be on terms adverse to your interests.
During the six months ended June 30, 2011, our cash and cash equivalents decreased by $1.1
million to $40.1 million. We intend to continue to grow our business, and intend to fund our
current operations and anticipated growth from the cash on hand. However, this may not be
sufficient to meet our needs. We may not be able to obtain financing on commercially reasonable
terms, or at all.
If additional financing is not available when required or is not available on acceptable
terms, we may be unable to fund our expansion, successfully promote our brand name, develop or
enhance our products and services, take advantage of business opportunities, or respond to
competitive pressures, any of which could have a material adverse effect on our business.
If we choose to raise additional funds through the issuance of equity securities, you may
experience significant dilution of your ownership interest and holders of the additional equity
securities may have rights senior to those of the holders of our common stock. If we obtain
additional financing by issuing debt securities or bank borrowings, the terms of these arrangements
could restrict or prevent us from paying dividends and could limit our flexibility in making
business decisions.
Our business may be sensitive to recessions.
The demand for online advertising may be linked to the level of economic activity and
employment in the U.S. and abroad. Specifically, our business is primarily dependent on the demand
for online advertising from travel and entertainment companies. The recent recession decreased
consumer travel and caused travel and entertainment companies to reduce or postpone their marketing
spending generally, and their online marketing spending in particular. Continued or future
recessions could have a material adverse effect on our business and financial condition.
Our operations could be significantly hindered by the occurrence of a natural disaster or other
catastrophic event.
Our operations are susceptible to outages due to fire, floods, power loss, telecommunications
failures, unexpected technical problems in the systems that power our websites and distribute our
e-mail newsletters, break-ins and similar events. In addition, a significant portion of our network
infrastructure is located in Northern California, an area susceptible to earthquakes. We do not
have multiple site capacity to protect us against any such occurrence. Outages could cause
significant interruptions of our service. In addition, despite our implementation of network
security measures, our servers are vulnerable to computer viruses, physical and electronic
break-ins, and similar disruptions from unauthorized tampering with our computer systems. We do not
carry business interruption insurance to compensate us for losses that may occur as a result of any
of these events.
Technological or other assaults on our service could harm our business.
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We are vulnerable to coordinated attempts to overload our systems with data, which could
result in denial or reduction of service to some or all of our users for a period of time. We have
experienced denial of service attacks in the past, and may experience such attempts in the future.
Any such event could reduce our revenue and harm our operating results and financial condition. We
do not carry business interruption insurance to compensate us for losses that may occur as a result
of any of these events.
We are subject to payments-related risks
We accept payments for the sale of vouchers using a variety of methods, including credit cards
and debit cards. We pay interchange and other fees, which may increase over time and raise our
operating expenses and lower profitability. We rely on third parties to provide payment processing
services, including the processing of credit cards and debit cards, and it could disrupt our
business if these companies become unwilling or unable to provide these services to us. We are also
subject to payment card association operating rules, certification requirements and rules governing
electronic funds transfers, which could change or be reinterpreted to make it difficult or
impossible for us to comply. Moreover, under payment card rules and our contracts with our card
processors, if there is a security breach of payment card information that we store, we could be
liable to the payment card issuing banks for their cost of issuing new cards and related expenses.
If we fail to comply with these rules or requirements, we may be subject to fines and higher
transaction fees and lose our ability to accept credit and debit card payments, process electronic
funds transfers, or facilitate other types of online payments, and our business and results of
operations could be adversely affected. If one or more of these contracts are terminated and we are
unable to replace them on similar terms, or at all, it could adversely affect our results of
operations
Risks Related to Our Markets and Strategy
Our international expansion may result in operating losses, and is subject
to other material risks.
In May 2005, we began operations in the U.K. In 2006, we began operations in Canada, Germany,
and Spain. In 2007, we began operations in France.
Although our revenues in Europe increased 60% in the six months ended June 30, 2011 from the
same period last year and our operations in Europe generated a profit of $1.8 million for the six
months ending June 30, 2011, our operations in Europe incurred losses of $1.8 million in the six
months ended June 30, 2010 and incurred losses of $1.8 million for the year ended December 31,
2010, primarily as a result of significant expenses related to subscriber acquisition and the
launch of Fly.com. We intend to continue adding a significant number of subscribers in selected
countries in which we operate as we believe this is one of the factors that will allow us to
increase our advertising rates and increase our revenues in Europe.
If we incur losses from our operations in Europe in the future, these losses may not have any
recognizable tax benefit. We expect that this would have a material negative impact on our net
income and cash flows. Any of these developments could result in a significant decrease in the
trading price of our common stock. In addition to uncertainty about our ability to generate net
income from our foreign operations and expand our international market position, there are certain
risks inherent in doing business internationally, including:
| trade barriers and changes in trade regulations; | ||
| difficulties in developing, staffing and simultaneously managing foreign operations as a result of distance, language and cultural differences; | ||
| stringent local labor laws and regulations; | ||
| currency exchange rate fluctuations; | ||
| risks related to government regulation; and | ||
| potentially adverse tax consequences. |
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We may not be able to continue developing awareness of our brand names.
We believe that continuing to build awareness of the Travelzoo and Fly.com brand names is
critical to achieving widespread acceptance of our business. Brand recognition is a key
differentiating factor among providers of online advertising opportunities, and we believe it could
become more important as competition in our industry increases. In order to maintain and build
brand awareness, we must succeed in our marketing efforts. If we fail to successfully promote and
maintain our brands, incur significant expenses in promoting our brands and fail to generate a
corresponding increase in revenue as a result of our branding efforts, or encounter legal obstacles
which prevent our continued use of our brand names, our business could be materially adversely
affected.
Our business may be sensitive to events affecting the travel industry in general.
Events like the war with Iraq or the terrorist attacks on the U.S. in 2001 or the recent
global financial crisis have a negative impact on the travel industry. We are not in a position to
evaluate the net effect of these circumstances on our business. In the longer term, our business
might be negatively affected by financial pressures on the travel industry. However, our business
may also benefit if travel companies increase their efforts to promote special offers or other
marketing programs. If such events result in a long-term negative impact on the travel industry,
such impact could have a material adverse effect on our business.
We may not be able to attract travel and entertainment companies or Internet users if we do not
continually enhance and develop the content and features of our products and services.
To remain competitive, we must continually improve the responsiveness, functionality, and
features of our products and services. We may not succeed in developing features, functions,
products, or services that travel and entertainment companies and Internet users find attractive.
This could reduce the number of travel and entertainment companies and Internet users using our
products and materially adversely affect our business.
We may lose business if we fail to keep pace with rapidly changing technologies and client needs.
Our success is dependent on our ability to develop new and enhanced software, services, and
related products to meet rapidly evolving technological requirements for online advertising. Our
current technology may not meet the future technical requirements of travel and entertainment
companies. Trends that could have a critical impact on our success include:
| rapidly changing technology in online advertising; | ||
| evolving industry standards, including both formal and de facto standards relating to online advertising; | ||
| developments and changes relating to the Internet; | ||
| competing products and services that offer increased functionality; and | ||
| changes in travel company, entertainment company, and Internet user requirements. |
If we are unable to timely and successfully develop and introduce new products and
enhancements to existing products in response to our industrys changing technological
requirements, our business could be materially adversely affected.
Our business and growth will suffer if we are unable to hire and retain highly skilled personnel.
Our future success depends on our ability to attract, train, motivate, and retain highly
skilled employees. We may be unable to retain our skilled employees, or attract, assimilate, and
retain other highly skilled employees in the future. We have from time to time in the past
experienced, and we expect to continue to experience in the future, difficulty in hiring and
retaining highly skilled employees with appropriate qualifications. If we are unable to hire and
retain skilled personnel, our growth may be restricted, which could adversely affect our future
success.
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We may not be able to effectively manage our expanding operations.
Since the commencement of our operations, we have experienced a period of rapid growth. In
order to execute our business plan, we must continue to grow significantly. As of June 30, 2011, we
had 343 employees. We expect that the number of our employees will continue to increase for the
foreseeable future. This growth has placed, and our anticipated future growth will continue to
place, a significant strain on our management, systems, and resources. We expect that we will need
to continue to improve our financial and managerial controls and reporting systems and procedures.
We will also need to continue to expand and maintain close coordination among our sales,
production, marketing, IT, and finance departments. We may not succeed in these efforts. Our
inability to expand our operations in an efficient manner could cause our expenses to grow
disproportionately to revenues, our revenues to decline or grow more slowly than expected and could
otherwise have a material adverse effect on our business.
Our operations may be adversely affected by changes in our senior management.
Effective July 1, 2010, Christopher Loughlin became the Companys Chief Executive Officer
replacing Holger Bartel. Mr. Loughlin served as the Companys Vice President of Business
Development from 2001 to 2005 and served as the Companys Senior Vice President and General
Manager, Travelzoo U.K. from 2005 to 2006. From 2006 to June 30, 2010, Mr. Loughlin served as the
Companys Executive Vice President, Europe. Mr. Loughlin has extensive familiarity with the
business and operations of the Company. However, there can be no assurances that these changes in
the senior management of the Company will not have an adverse effect on the business of the
Company, temporarily or otherwise.
Intense competition may adversely affect our ability to achieve or maintain market share and
operate profitably.
We face intense competition. We compete for advertising dollars with large Internet portal
sites, such as America Online, MSN, and Yahoo!, that offer listings or other advertising
opportunities for travel and entertainment companies. These companies have significantly greater
financial, technical, marketing, and other resources and larger client bases. We compete with
search engines like Google and Yahoo! Search that offer pay-per-click listings. We compete with
travel meta-search engines and online travel deal publishers. We compete with large online travel
agencies like Expedia and Priceline that also offer advertising placements. We compete with
companies like Groupon and LivingSocial that also sell vouchers for deals from local businesses
such as spas and restaurants. In addition, we compete with newspapers, magazines, and other
traditional media companies that operate websites which provide online advertising opportunities.
We expect to face additional competition as other established and emerging companies, including
print media companies, enter the online advertising market. Competition could result in reduced
margins on our services, loss of market share, or less use of Travelzoo by travel companies,
entertainment companies, and consumers. If we are not able to compete effectively with current or
future competitors as a result of these and other factors, our business could be materially
adversely affected.
Loss of any of our key management personnel could negatively impact our business.
Our future success depends to a significant extent on the continued service and coordination
of our management team, particularly Christopher Loughlin, our Chief Executive Officer. The loss or
departure of any of our officers or key employees could materially adversely affect our ability to
implement our business plan. We do not maintain key person life insurance for any member of our
management team. In addition, we expect new members to join our management team in the future.
These individuals will not previously have worked together and will be required to become
integrated into our management team. If our key management personnel are not able to work together
effectively or successfully, our business could be materially adversely affected.
We may not be able to access third party technology upon which we depend.
We use technology and software products from third parties including Microsoft and ITA
Software. Technology from our current or other vendors may not continue to be available to us on
commercially reasonable terms, or at all. Our business will suffer if we are unable to access this
technology, to gain access to additional products or to integrate new technology with our existing
systems. This could cause delays in our development and introduction of new services and related
products or enhancements of existing products until equivalent or replacement technology can be
accessed, if available, or developed internally, if feasible. If we experience these delays, our
business could be materially adversely affected.
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Risks Related to the Market for our Shares
Our stock price has been volatile historically and may continue to be volatile.
The trading price of our common stock has been and may continue to be subject to wide
fluctuations. During the twelve months ended July 31, 2011, the closing price of our common stock
on the NASDAQ Global Select Market ranged from $14.15
to $101. Our stock price may fluctuate in response to a number of events and factors, such as
quarterly variations in operating results; announcements of technological innovations or new
products by us or our competitors; changes in financial estimates and recommendations by securities
analysts; the operating and stock price performance of other companies that investors may deem
comparable to us; and news reports relating to trends in our markets or general economic
conditions.
In addition, the stock market in general, and the market prices for Internet-related companies
in particular, have experienced volatility that often has been unrelated to the operating
performance of such companies. These broad market and industry fluctuations may adversely affect
the price of our stock, regardless of our operating performance.
We are controlled by a principal stockholder.
Ralph Bartel, who founded Travelzoo and who is a Director of Travelzoo, is our largest
stockholder, holding beneficially, as of August 1, 2011, approximately 51.6% of our outstanding
shares. Through his share ownership, he is in a position to control Travelzoo and to elect our
entire board of directors.
Risks Related to Legal Uncertainty
We may become subject to burdensome government regulations and legal uncertainties affecting the
Internet which could adversely affect our business.
To date, governmental regulations have not materially restricted use of the Internet in our
markets. However, the legal and regulatory environment that pertains to the Internet is uncertain
and may change. Uncertainty and new regulations could increase our costs of doing business, prevent
us from delivering our products and services over the Internet, or slow the growth of the Internet.
In addition to new laws and regulations being adopted, existing laws may be applied to the
Internet. New and existing laws may cover issues which include:
| user privacy; | ||
| anti-spam legislation; | ||
| consumer protection; | ||
| copyright, trademark and patent infringement; | ||
| pricing controls; | ||
| characteristics and quality of products and services; | ||
| sales and other taxes; and | ||
| other claims based on the nature and content of Internet materials. |
We may be liable as a result of information retrieved from or transmitted over the Internet.
We may be sued for defamation, negligence, copyright or trademark infringement or other
legal claims relating to information that is published or made available in our products. These
types of claims have been brought, sometimes successfully, against online services in the past. The
fact that we distribute information via e-mail may subject us to potential risks, such as
liabilities or claims resulting from unsolicited e-mail or spamming, lost or misdirected messages,
security breaches, illegal or fraudulent use of e-mail or interruptions or delays in e-mail
service. In addition, we could incur significant costs in investigating and defending such claims,
even if we ultimately are not liable. If any of these events occur, our business could be materially
adversely affected.
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The implementation of the CARD Act and similar state and foreign laws may harm our Local Deals
business.
Vouchers which are issued under our Local Deals may be considered gift
cards, gift certificates, stored value cards or prepaid cards and therefore governed by, among
other laws, the CARD Act, and state laws governing gift cards, stored value cards and coupons.
Other foreign jurisdictions have similar laws in place, in particular European jurisdictions where
the European E-Money Directive regulates the business of electronic money institutions. Many of
these laws contain provisions governing the use of gift cards, gift certificates, stored value
cards or prepaid cards, including specific disclosure requirements and prohibitions or limitations
on the use of expiration dates and the imposition of certain fees. For example, if the vouchers are
subject to the CARD Act and are not included in the exemption for promotional programs, it is
possible that the purchase value, which is the amount equal to the price paid for the voucher, or
the promotional value, which is the add-on value of the voucher in excess of the price paid, or
both, may not expire before the later of (i) five years after the date on which the voucher was
issued; (ii) the vouchers stated expiration date (if any); or (iii) a later date provided by
applicable state law. Purported class actions against other companies have been filed in federal and state court claiming
that coupons similar to the vouchers are subject to the CARD Act and various state laws governing
gift cards and that the defendants have violated these laws by issuing the coupons with expiration
dates and other restrictions. In addition, investigations by certain state attorney general offices have been launched against other companies with regards to similar issues. If similar claims are asserted against the Company in respect of the
Local Deals vouchers and are successful, we may become subject to fines and penalties and incur
additional costs. In addition, if federal or state laws require that the face value of our vouchers
have a minimum expiration period beyond the period desired by a merchant for its promotional
program, or no expiration period, this may affect the willingness of merchants to issue vouchers in
jurisdictions where these laws apply. Such developments may materially and adversely affect the
profitability or viability of our Local Deals.
Our internal controls over financial reporting may not be effective, and our independent auditors
may not be able to certify as to the effectiveness of such internal controls, which could have a
significant and adverse effect on our business.
We are obligated to evaluate our internal controls over financial reporting in order to allow
management to report on, and our independent auditors to opine on, our internal controls over
financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and
regulations of the SEC, which we collectively refer to as Section 404. In our Section 404
evaluation, we have identified areas of internal controls that may need improvement and have
instituted remediation efforts where necessary. Currently, none of our identified areas that need
improvement has been categorized as material weaknesses. We may identify conditions that may result
in significant deficiencies or material weaknesses in the future.
We may be unable to protect our registered trademark or other proprietary intellectual property
rights.
Our success depends to a significant degree upon the protection of the Travelzoo brand name.
We rely upon a combination of copyright, trade secret and trademark laws, as well as non-disclosure
and other contractual arrangements to protect our intellectual property rights. The steps we have
taken to protect our proprietary rights, however, may not always succeed in deterring
misappropriation of proprietary information.
We have registered the Travelzoo trademark in the U.S., Australia, Canada, China, Hong Kong,
Japan, South Korea, Taiwan, the EU and the U.K. If we are unable to protect our rights in the mark
in North America, Europe, and Asia Pacific, where we have licensed the trademark as described above
under overview, a key element of our strategy of promoting Travelzoo as a brand could be
disrupted and our business could be adversely affected. We may not always be able to detect
unauthorized use of our proprietary information or take appropriate steps to enforce our
intellectual property rights. In addition, the validity, enforceability, and scope of protection of
intellectual property in Internet-related industries are uncertain and still evolving. The laws of
countries in which we may market our services in the future are uncertain and may afford little or
no effective protection of our intellectual property. The unauthorized reproduction or other
misappropriation of our proprietary technology could enable third parties to benefit from our
technology and brand name without paying us for them. If this were to occur, our business could be
materially adversely affected.
We may face liability from intellectual property litigation that could be costly to prosecute or
defend and distract managements attention with no assurance of success.
We cannot be certain that our products, content and brand names do not or will not infringe
valid patents, copyrights or other intellectual property rights held by third parties. While we
have a trademark for Travelzoo, many companies in the industry have similar names including the
word travel. We expect that infringement claims in our markets will increase in number as more
participants enter the markets. We may be subject to legal proceedings and claims from time to time
relating to the intellectual property of others in the ordinary course of our business. We may
incur substantial expenses in defending against these third party infringement
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claims, regardless of their merit, and such claims could result in a significant diversion of
the efforts of our management personnel. Successful infringement claims against us may result in
monetary liability or a material disruption in the conduct of our business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We believe that our potential exposure to changes in market interest rates is not material.
The Company has no outstanding debt and is not a party to any derivatives transactions. We invest
in highly liquid investments with short maturities. Accordingly, we do not expect any material loss
from these investments.
Our operations in Canada expose us to foreign currency risk associated with agreements being
denominated in Canadian Dollars. Our operations in Europe expose us to foreign currency risk
associated with agreements being denominated in British Pound Sterling and Euros. We are exposed to
foreign currency risk associated with fluctuations of these currencies as the financial position
and operating results of our operations in Canada and Europe are translated into U.S. Dollars for
consolidation purposes. We do not use derivative instruments to hedge these exposures. We are a net
receiver of U.S. Dollars from our foreign subsidiaries and therefore benefit from a weaker U.S.
dollar and are adversely affected by a stronger U.S. dollar relative to the foreign currency used
by the foreign subsidiary as its functional currency. We have performed a sensitivity analysis as
of June 30, 2011, using a modeling technique that measures the change in the fair values arising
from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates relative
to the U.S. dollar with all other variables held constant. The foreign currency exchange rates we
used were based on market rates in effect at June 30, 2011. The sensitivity analysis indicated that
a hypothetical 10% adverse movement in foreign currency exchange rates would result in an
incremental $90,000 foreign exchange loss for the six month periods ended June 30, 2011.
Item 4. Controls and Procedures
For the period ended June 30, 2011, we carried out an evaluation, under the supervision and
with the participation of the Companys management, including the Companys Chief Executive Officer
along with the Companys Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e).
Based upon that evaluation, the Companys Chief Executive Officer along with the Companys Chief
Financial Officer concluded that our disclosure controls and procedures were effective as of June
30, 2011 to ensure that the information required to be disclosed by us in this quarterly report was
recorded, processed, summarized and reported within the time periods specified in the SECs rules
and regulations and were also effective to ensure that information required to be disclosed by us
in this quarterly report was accumulated and communicated to our management including the Companys
Chief Executive Officer and the Companys Chief Financial Officer to allow timely decisions
regarding its disclosure.
During the three months ended June 30, 2011, there was no change in our internal control over
financial reporting (as defined in Exchange Act Rule 13a-15(f)) that materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting.
PART IIOTHER INFORMATION
Item 1A. Risk Factors
An updated description of the risk factors associated with our business is included under
Risk Factors in Managements Discussion and Analysis of Financial Condition and Results of
Operations, contained in Item 2 of Part I of this report. This description includes any material
changes to and supersedes the description of the risk factors associated with our business
previously disclosed in Item 1A of our 2010 Annual Report on Form 10-K and is incorporated herein
by reference.
Item 6. Exhibits
The following table sets forth a list of exhibits:
Exhibit | ||
Number | Description | |
3.1
|
Certificate of Incorporation of Travelzoo Inc. (Incorporated by reference to our Pre-Effective Amendment No. 6 to Registration Statement on Form S-4 (File No. 333-55026), filed February 14, 2002). | |
3.2
|
By-laws of Travelzoo Inc. (Incorporated by reference to Pre-Effective Amendment No. 6 to our Registration Statement on Form S-4 (File No. 333-55026), filed February 14, 2002). |
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Exhibit | ||
Number | Description | |
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. | |
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. | |
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS
|
XBRL Instance Document | |
101.SCH
|
XBRL Taxonomy Extension Schema Document | |
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document |
| Filed herewith | |
| Furnished herewith |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TRAVELZOO INC. (Registrant) |
||||
By: | /s/ GLEN CEREMONY | |||
Glen Ceremony | ||||
On behalf of the Registrant and as Chief Financial
Officer and Principal Accounting Officer |
||||
Date: August 4, 2011
34