TripAdvisor, Inc. — Form 10-Q Summary
Business Context and Reporting Period
TripAdvisor operates an online travel platform built around user-generated reviews, travel research, price comparison and booking services. Its two reportable segments are Hotel and Non-Hotel, comprising Attractions, Restaurants and Vacation Rentals. This unaudited filing covers the three months ended March 31, 2017, compared with the same period in 2016. Results are seasonally lower in the first quarter, with performance generally strongest in the third quarter.
Financial Performance and Liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $372 million | $352 million | 6% |
| Operating income | $27 million | $42 million | (36%) |
| Net income | $13 million | $29 million | (55%) |
| Diluted EPS | $0.09 | $0.20 | Down $0.11 |
| Adjusted EBITDA | $73 million | $85 million | (14%) |
| Cash flow from operations | $134 million | $124 million | 8% |
- Operating margin declined to approximately 7.3% from 11.9%; net margin declined to approximately 3.5% from 8.2%. Adjusted EBITDA margin was approximately 19.6% versus 24.1%.
- Hotel revenue increased 4% to $314 million, while Non-Hotel revenue increased 18% to $58 million.
- Hotel Adjusted EBITDA declined 17% to $88 million, and its margin fell to 28% from 35%, primarily because of higher search-engine marketing and online traffic acquisition costs.
- Non-Hotel Adjusted EBITDA improved to a loss of $15 million from a loss of $21 million.
- Selling and marketing expense increased 20% to $207 million, including a $31 million increase in search-engine marketing and other online traffic acquisition costs. Selling and marketing reached 55.6% of revenue versus 48.9%.
- Cash, cash equivalents and marketable securities totaled $749 million at March 31, 2017, compared with $746 million at December 31, 2016.
- Total debt was $217 million, consisting of $210 million of long-term debt and $7 million of short-term Chinese borrowings. Approximate cash and securities exceeded reported debt by $532 million.
- The company had approximately $787 million of available capacity under the 2015 Credit Facility, $73 million under the 2016 Credit Facility and approximately $33 million under its Chinese facilities. It was in compliance with debt covenants.
- Capital expenditures were $18 million. Investing cash flow of $98 million was driven primarily by sales and maturities of marketable securities.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by a 12% increase in TripAdvisor-branded click-based and transaction revenue to $211 million, supported by 9% growth in average monthly unique hotel shoppers and 2% growth in revenue per hotel shopper.
- Hotel display-based advertising and subscription revenue declined 4% to $65 million, while other Hotel revenue declined 17% to $38 million.
- U.S. revenue increased 14% to $210 million, while Europe revenue declined 4% to $98 million and the rest of world declined 3% to $64 million.
- Mobile visitors represented nearly half of average monthly unique visitors and grew 28% year over year. Management noted that mobile traffic monetizes materially below desktop and tablet traffic.
- Net income and operating income declined despite revenue growth because marketing costs increased substantially and the effective tax rate rose to 48.0% from 23.7%.
- Operating cash flow increased despite lower net income, primarily because of working-capital movements, including an $88 million increase in deferred merchant payables.
- The company repurchased 3.53 million common shares for $150 million at an average price of $42.49. The remaining authorization was approximately $100 million at quarter-end. Net borrowings under the 2015 Credit Facility were used primarily to fund the repurchases.
Guidance, Outlook, Commentary and Risks
- The filing does not provide a clear quantitative revenue, earnings or margin outlook.
- Management remains focused on improving the end-to-end booking experience, increasing traffic and conversion, expanding mobile monetization, and growing Attractions, Restaurants and Vacation Rentals.
- Instant booking remains strategically important but historically generated lower revenue per hotel shopper than metasearch. The consumption model also delays revenue recognition until a traveler completes a stay.
- Management expects continued investment in mobile products, bookable supply and traffic acquisition. These investments may pressure near-term profitability.
- Key operating risks include dependence on search engines and online traffic acquisition, competition from OTAs and large technology platforms, reliance on significant advertising partners, lower mobile monetization, travel-industry seasonality, macroeconomic and geopolitical events, terrorism, foreign-exchange volatility, privacy and cybersecurity requirements, and vacation-rental regulation.
- The IRS proposed transfer-pricing adjustments for 2009 and 2010 that could increase worldwide income tax expense by an estimated $10 million to $14 million after competent-authority relief, excluding interest and penalties. The company disagrees and intends to defend its position. Similar adjustments for later years could create additional exposure.
- Approximately $572 million of cash, cash equivalents and marketable securities was held outside the United States, and approximately $822 million of foreign earnings was considered indefinitely reinvested. Repatriation could result in additional U.S. tax and cash payments.
- Liberty TripAdvisor Holdings beneficially controlled approximately 57% of voting power through its Class B ownership, creating concentrated-control and governance risks.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether higher paid marketing spending produces sustainable growth in hotel shoppers, conversion and revenue per shopper.
- The pace at which instant booking closes its monetization gap with metasearch and the effect of consumption-based revenue recognition on reported results.
- Mobile traffic growth and whether mobile monetization improves without further compressing margins.
- The sustainability of Hotel segment profitability while Non-Hotel businesses continue investing for growth.
- The outcome and potential broader implications of the IRS transfer-pricing audits and proposed adjustments.
- Debt usage, variable-rate exposure and whether share repurchases continue to be funded partly with borrowings.
- The effect of advertising-partner concentration, search-engine changes, competition, foreign exchange and travel-market disruptions.