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Consumer Cyclical

Travel & Leisure

Travelzoo

Investment Appraisal
We believe that the Travelzoo shares represent an attractive way to play the advertising recovery in the travel industry, But, investors should be mindful of the impact that the shift in the company&#8217;s business model to a more normalized model will have. Over the past year, the company boosted its liquidity as it shifted its advertising based business model to the sale of travel vouchers. The vouchers were very popular as travelers could capture deals for future travel with the prospect of no cancellation fees or rebooking fees. The sale of the vouchers substantially increased its cash position, from $14.4 million as of March 31, 2020 to $63.06 million as of December 31, 2020. The influx of cash is temporary, however, as the company is expected to shift back toward its advertising based model and as consumers redeem the vouchers. Notably, as of December 30, there was a sizable $57.1 million in Merchant Receivables. Once redeemed, the company will be required to pay the Merchants. As such, the large cash position that the company currently enjoys is virtually all earmarked to be paid out, likely over the next 2 years.&nbsp;
 Currently, there is great interest from travel providers to advertise to consumers that appear very interested in international travel. As such, we believe that there will be a robust advertising recovery. Voucher sales are expected to decrease and voucher redemptions are expected to increase. Given the current &#8220;lock down&#8221; situations in many countries, we believe that voucher sales will continue to be strong in the first and even the second quarters of this year. As such, the company&#8217;s cash position is expected to potentially increase from lofty December 2020 levels to as much as $70 million, before tapering off. It is possible that by the end of 2021, the company&#8217;s cash position will decrease to $55 million and then to $45 million by Q1 2022. Again, much depends upon the level of voucher redemptions.
Currently, the U.S. and the United Kingdom appear to be leading the travel recovery. There is a rapid pace of vaccinations for Covid which provide some encouragement for a strong travel recovery. Unfortunately, there are still popular international travel destinations that are still closed. We believe that opening world economies, safety protocols, increased vaccinations for Covid 19, and travel promotions will be the key to driving travel demand. For now, travel vouchers will be a key revenue driver for the company through the second quarter. During the second quarter, the company will shift gears toward advertising, which carries more attractive margins. Consequently, we anticipate that the company will improve margins, both gross margins and adjusted EBITDA margins in coming quarters and next several years.&nbsp;
The first quarter, however, is expected to be similar to the fourth quarter results, although revenues are expected to moderate and reflect sequential improvement from Q4. We anticipate that first quarter revenues to decrease 32% to $13.65 million, which is better than the 54% decline in the fourth quarter. Gross margins are expected to be down year over year to 78%, roughly the same as the fourth quarter, but significantly down from 87% a year earlier. We anticipate that cash flow, as measured by adjusted EBITDA, to be roughly break even. Our estimates and revisions from our previous estimate are in the following Figure.&nbsp;
 Second quarter revenues are expected to significantly improve due to year-earlier comparisons which reflected the impact of the pandemic. We do not believe that the company will be fully transitioned toward an advertising model and voucher sales will still be significant. Gross profit margins are expected to show some modest improvement to 78.7% to reflect the higher margin advertising business. Q2 adjusted EBITDA is expected to be modest, roughly $800,000. The second half 2021 is expected to gain momentum as the travel recovery gains steam. We anticipate that gross margins will slightly improve from the first half to 79% in Q3 and to 80.7% in Q4. It is notable that in Q3, we anticipate that the company will receive a $3 million PPP loan forgiveness. This will likely decrease G&amp;A expenses by the $3 million and the company is expected to report $4.5 million in adjusted EBITDA. Notably, we do not view the $3 million loan forgiveness as a continuing operations.&nbsp;
As such, given the revisions and excluding the positive impact of the $3 million PPP loan forgiveness, we are lowering our 2021 adjusted EBITDA estimate (from continuing operations) from $8.60 million to $4.83 million. We anticipate that the travel industry advertising recovery will gain steam in 2022 and we believe that gross margins should improve. Nonetheless, given the lower base revenues and cash flow in 2021, we are lowering our full year 2022 revenue and adj. EBITDA estimate to $78.8 million from $81.2 million and to $9.5 million from $11.7 million respectively.
Looking into 2022, we believe that management is anticipating attractive growth from Jack&#8217;s Flight Club. The decision to expand Jack&#8217;s Flight Club to the United States may be a 2023 event, as the company likely will wait to invest in this business until it has a good footing into a recovery. We anticipate total company 2023 revenue of $92 million, which is still below peak revenue levels of $111.4 million in 2019. Given substantial cost reduction, however, the company is expected to generate $14.6 million in cash flow, well above the $11.8 million in 2019.&nbsp;
The TZOO shares have performed well, as investors look for companies that will benefit post pandemic. The shares increased 179% to near current levels from September 2020 lows. Certainly, the travel industry was among the hardest hit industries from the pandemic and investors appear eager to invest in companies that are likely to recover post pandemic. We wonder if investors have gotten a little to far over their skis. In our view, investors do not appear to have factored in the likelihood that the company&#8217;s cash position will diminish over time. Given that the cash position will nearly entirely be wiped away as vouchers are redeemed, we have decided not to account for the cash position in our Enterprise Value calculation. In addition, we are using fully diluted share count of 14.8 million, which accounts for stock options.&nbsp;
As such, near current levels, the TZOO shares trade at 26.6 times Enterprise Value to our adjusted 2022 EBITDA and 17.4 times our 2023 adjusted EBITDA estimate. We believe that the multiples reasonably reflects the company&#8217;s double digit cash flow growth outlook in a travel recovery. However, we believe that the market does not fully reflect the anticipated sluggish start to 2021, the difficult comps that it will face in 2022. As such, we rate the shares Market Perform. Notably, the company has a clean balance sheet and acquisition fueled growth is possible. Furthermore, given the current stock valuation, we believe that acquisitions would be accretive.&nbsp;

 
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/tzooq1outlook.jpg" style="width: 335px;height: 955px" />
Full Year 2021 and 2022 Revisions
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/tzoorevisions.jpg" style="width: 492px;height: 893px" />

Travelzoo (TZOO)

Expecting A Slow Start Toward Recovery

Fundamental Analysis:

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Liftoff in Europe? (TZOO)

Flies Around The Storm Clouds (TZOO)

Results Point Toward Favorable Momentum (TZOO)

A Merger Long In The Making (TZOO)

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