Travelzoo 2008 Annual Report Download - page 47

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 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 actual number of valid 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 3 to the consolidated financial statements for further details about our liabilities to former
stockholders.
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, 2008, 2007 and 2006.
2008 2007 2006
Year Ended December 31,
Revenues ................................................. 100.0% 100.0% 100.0%
Cost of revenues............................................ 3.7 1.2 0.8
Gross profit ............................................. 96.3 98.8 99.2
Operating expenses:
Sales and marketing ....................................... 60.4 52.5 42.2
General and administrative .................................. 32.1 20.2 14.2
Total operating expenses .................................. 92.5 72.7 56.4
Income from operations ...................................... 3.8 26.1 42.8
Other income and expenses, net ................................ 1.0 1.9 1.8
Income before income taxes ................................... 4.8 28.0 44.6
Income taxes .............................................. 9.9 16.5 20.4
Net income (loss) ........................................... (5.1)% 11.5% 24.2%
For the year ended December 31, 2008, we reported income from operations of approximately $3.1 million. As
of December 31, 2008, we had retained earnings of approximately $21.8 million. Our operating margin decreased to
3.8% for the year ended December 31, 2008 from 26.1% in 2007. 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, 2008 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 year to year
and from quarter to quarter. Some of the fluctuations may be significant and have a material impact on our results of
operations.
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