Travelzoo 2007 Annual Report Download - page 54

Results of Operations
The following table sets forth, as a percentage of total revenues, the results of our operations for the years
ended December 31, 2007, 2006 and 2005.
2007 2006 2005
Year Ended December 31,
Revenues ................................................. 100.0% 100.0% 100.0%
Cost of revenues............................................ 2.7 1.5 1.7
Gross profit............................................ 97.3 98.5 98.3
Operating expenses:
Sales and marketing ....................................... 52.5 42.2 51.0
General and administrative .................................. 18.7 13.5 18.0
Total operating expenses .................................. 71.2 55.7 69.0
Income from operations ...................................... 26.1 42.8 29.3
Other income and expenses, net ................................ 1.9 1.8 1.9
Income before income taxes ................................... 28.0 44.6 31.2
Income taxes .............................................. 16.5 20.4 15.5
Net income ............................................... 11.5% 24.2% 15.7%
For the year ended December 31, 2007, we reported income from operations of approximately $20.6 million.
As of December 31, 2007, we had retained earnings of approximately $25.9 million. Our operating margin
decreased to 26.1% for the year ended December 31, 2007 from 42.8% in 2006. The main reason for the decrease in
operating margin is that our sales and marketing expenses and general and administrative expenses as a percentage
of revenue increased at a higher rate than our revenue for the year ended December 31, 2007 compared to the prior
year (see “Operating Expenses” below).
We do not know what our sales and marketing expenses as a percentage of revenue 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 revenue. 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,
we expect our strategy to replicate our business model in selected foreign markets (see “Growth Strategy” below) to
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 revenue 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 revenue 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 Company’s 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 that we will incur significant expenses in 2008 in order to allow management to
report on, and our independent auditors to attest to, our internal controls over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”). At this time, the total cost is not reliably estimable as it
will be dependent on the number of areas requiring improvement and the extent of any required remediation efforts
as well as growth of our international operations. We expect our planned 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 revenue 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 to convert shares into Travelzoo Inc.
within the required time period.
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