Travelzoo 2006 Annual Report Download - page 49

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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, 2006, 2005 and 2004.
2006 2005 2004
Year Ended
December 31,
Revenues. . . .................................................. 100% 100% 100%
Cost of revenues ............................................... 1 2 2
Gross profit ............................................... 99 98 98
Operating expenses:
Sales and marketing ........................................... 42 51 47
General and administrative ...................................... 14 18 18
Total operating expenses ...................................... 56 69 65
Income from operations .......................................... 43 29 33
Interest income ................................................ 2 2 —
Income before income taxes ....................................... 45 31 33
Income taxes .................................................. 21 15 15
Net income . .................................................. 24% 16% 18%
For the year ended December 31, 2006, we reported income from operations of approximately $29.8 million.
As of December 31, 2006, we had retained earnings of approximately $34.6 million. Our operating margin
increased to 42.8% for the year ended December 31, 2006 from 29.3% in 2005. The main reason for this increase in
operating margin is that our sales and marketing expenses as a percentage of revenue did not increase at the same
rate as our revenues due primarily to a decrease in marketing expenses as a result of a lower cost of acquiring new
subscribers and fewer new subscribers acquired (see “Subscriber Acquisition” below). Another reason for this
increase in our operating margin is that our general and administrative expenses as a percentage of revenue did not
increase at the same rate as our revenues due primarily to a decrease in the number of requests received related to a
program in 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.
We do not know whether our sales and marketing expenses as a percentage of revenue will continue to decrease
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, 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 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 2007 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
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