Tripadvisor, Inc. Form 10-Q Summary
Business Context and Reporting Period
Tripadvisor operates an online travel platform offering user-generated travel content, hotel metasearch and booking, attractions, restaurant reservations, and vacation rentals. Reportable segments are Hotel and Non-Hotel. This unaudited filing covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
Financial Performance and Key Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|
| Revenue | $439 million | $421 million | $1,235 million | $1,164 million |
| Operating income | $42 million | $66 million | $115 million | $156 million |
| Net income | $25 million | $55 million | $65 million | $119 million |
| Diluted EPS | $0.18 | $0.37 | $0.46 | $0.81 |
| Adjusted EBITDA | $95 million | $114 million | $269 million | $294 million |
| Operating margin | 9.6% | 15.7% | 9.3% | 13.4% |
| Adjusted EBITDA margin | 21.6% | 27.1% | 21.8% | 25.3% |
- Q3 revenue increased 4%; nine-month revenue increased 6%.
- Q3 net income declined 55%; nine-month net income declined 45%. The effective tax rate increased to 34.2% in Q3 and 39.3% for nine months, versus 12.7% and 18.5%, respectively, in 2016.
- Q3 selling and marketing expense increased 18% to $247 million, including approximately $42 million of television campaign costs. Nine-month selling and marketing expense increased 17% to $683 million.
- Stock-based compensation was $26 million in Q3 and $72 million for nine months, compared with $22 million and $64 million, respectively, in 2016.
Segment Results and Material Changes
| Segment | Q3 2017 Revenue | Change | Q3 2017 Adjusted EBITDA | Change |
|---|
| Hotel | $312 million | (3%) | $51 million | (48%) |
| Non-Hotel | $127 million | 26% | $44 million | 193% |
- Hotel revenue was pressured by an 11% decline in revenue per hotel shopper, driven by lower cost-per-click bids and increased mobile traffic, partly offset by 7% growth in average monthly unique hotel shoppers.
- Hotel Adjusted EBITDA declined primarily because of the television brand campaign and, for the nine-month period, higher search-engine marketing and traffic acquisition costs.
- Non-Hotel revenue and Adjusted EBITDA benefited from increased bookable supply, user demand, bookings, and operating efficiencies in Attractions and Restaurants.
- Average monthly unique visitors to TripAdvisor-branded sites were 455 million in Q3, while average monthly unique hotel shoppers increased 7% year over year. More than half of monthly unique visitors used mobile phones; mobile monetization remained below desktop and tablet monetization.
Cash Flow, Liquidity, Debt, and Capital Allocation
- Cash flow from operations was $220 million for the first nine months of 2017, down from $276 million, primarily reflecting lower net income and working-capital timing.
- Investing activities provided $64 million, compared with $140 million used in 2016, mainly because of net sales and maturities of marketable securities and no acquisitions during the period.
- Financing activities used $163 million, including $250 million for share repurchases, partly offset by net borrowings under the 2015 Credit Facility.
- Capital expenditures were $50 million for nine months. Management expected full-year 2017 capital expenditures to be comparable with 2016 levels.
- Cash and cash equivalents were $750 million at September 30, 2017, compared with $612 million at December 31, 2016. Cash, cash equivalents, and marketable securities totaled $769 million.
- Total debt was $272 million, consisting of $265 million of long-term debt and $7 million of short-term Chinese borrowings. The 2015 revolving credit facility was increased to $1.2 billion and extended to May 2022; approximately $932 million of capacity remained available.
- The company completed a $250 million repurchase program by June 30, 2017, repurchasing 6.1 million shares at an average price of approximately $41.13. No shares were repurchased in Q3.
- Management stated that available liquidity and expected operating cash flow should fund foreseeable needs for at least the next twelve months.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide specific revenue or earnings guidance. Management expects 2017 capital expenditures to be comparable with 2016 spending.
- Management intends to continue investing in brand advertising, mobile products, hotel shopping, and Non-Hotel supply and booking capabilities. The television campaign is expected to have a longer-term return than online marketing but created near-term pressure on margins.
- Travel-sector seasonality typically makes the second and third quarters the strongest periods and the first and fourth quarters weaker.
- The IRS proposed adjustments related to transfer-pricing arrangements for 2009 and 2010 that could increase worldwide income tax expense by an estimated $10 million to $14 million, excluding interest and penalties. Tripadvisor disputes the adjustments and is pursuing administrative remedies.
- The company faces risks related to competition, dependence on major advertising partners, search-engine and mobile-platform changes, lower mobile monetization, travel demand, foreign currency, privacy and cybersecurity, regulation of vacation rentals, intellectual property, and legal and tax proceedings.
- Liberty TripAdvisor Holdings beneficially controlled approximately 57.5% of voting power through its Class B holdings and other shares, creating significant controlling-stockholder and governance risk.
- The company reported compliance with debt covenants, effective disclosure controls, and no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether hotel revenue per shopper and cost-per-click trends improve as the redesigned shopping experience and brand campaign mature.
- Whether Non-Hotel growth, particularly Attractions and Restaurants, can offset declining Hotel profitability.
- The sustainability and return on investment of television and other customer-acquisition spending.
- The resolution and ultimate cash-tax impact of the IRS transfer-pricing proposals and other tax audits.
- Cash generation after share repurchases, variable-rate debt service, capital expenditures, and seasonal changes in deferred merchant payables.
- The effects of mobile traffic growth, search-engine changes, major advertiser concentration, competitive pressure, and Liberty TripAdvisor Holdings’ voting control.
