TripAdvisor, Inc. — Q1 2013 Form 10-Q Summary
Business context and reporting period
TripAdvisor is an online travel platform operating one reportable segment. It generates substantially all revenue from advertising, primarily click-based and display-based advertising, with additional revenue from Business Listings, Vacation Rentals, transactions and content licensing. The filing covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012. Results are unaudited and interim results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $229.9 million | $183.7 million | 25% |
| Operating income | $88.3 million | $73.4 million | 20% |
| Net income attributable to TripAdvisor | $62.3 million | $48.1 million | 29% |
| Diluted EPS | $0.43 | $0.35 | 23% |
| Adjusted EBITDA | $109.3 million | $84.2 million | 30% |
| Net cash provided by operating activities | $43.7 million | $29.7 million | 47% |
Revenue increased 25%, led by click-based advertising of $179 million, up 24%; display advertising of $25 million, up 14%; and subscription, transaction and other revenue of $26 million, up 51%. Expedia-related revenue was $60.5 million, or 26.3% of total revenue, compared with $51.6 million, or 28.1%, in the prior-year quarter.
Operating margin was approximately 38.4%, compared with 39.9% in Q1 2012. Net margin was approximately 27.1%, compared with 26.2%. Adjusted EBITDA margin was approximately 47.6%, compared with 45.8%. The effective tax rate declined to 26.2% from 32.3%, primarily due to a greater proportion of earnings in lower-tax foreign jurisdictions and a prior-year restructuring.
Cash and cash equivalents were $211.9 million at March 31, 2013, compared with $367.5 million at December 31, 2012. Short- and long-term marketable securities totaled $385.2 million, bringing cash, cash equivalents and marketable securities to approximately $597.0 million. Approximately $310 million was held by international subsidiaries, and approximately $399 million of foreign earnings were intended to remain permanently reinvested outside the United States.
Operating cash flow was partly offset by $178.7 million of investing cash outflows, primarily the purchase of $213.7 million of marketable securities, and $18.8 million of financing cash outflows. Capital expenditures, including internal-use software and website development, were $9.3 million.
Total borrowings were $391.3 million at March 31, 2013, consisting of $370.0 million under the term loan and $21.3 million under Chinese credit facilities. The revolving credit facility had no outstanding borrowings. The term loan requires $30 million of principal payments in 2013, $40 million in each of 2014 and 2015, and $260 million in 2016. Management stated that the company was in compliance with its debt covenants and expected available liquidity and operating cash flow to fund requirements for at least the next 12 months.
Material changes versus the prior comparable period
- Hotel shoppers increased 41%, but revenue per hotel shopper declined 10%, principally because of the transition to hotel metasearch, increased smartphone usage and lower monetization in emerging international markets.
- International revenue increased 31% and represented 50% of total revenue, compared with 48% in Q1 2012.
- Technology and content expense increased 62% to $28.8 million, reflecting higher headcount, international expansion, mobile and tablet development, metasearch development and stock-based compensation.
- Stock-based compensation increased to $13.6 million from $4.7 million.
- Cash declined because the company invested $213.7 million in marketable securities and repaid debt, while operating cash flow improved.
- The company authorized a $250 million share-repurchase program in February 2013 but repurchased no shares during the quarter.
Guidance, outlook, commentary and risks
Management did not provide specific numerical full-year revenue or earnings guidance in the filing. Management expected the transition to hotel metasearch to continue reducing user conversion and negatively affect revenue growth over the balance of 2013. The strategy was expected to produce higher-converting leads and potentially higher pricing over time, but at lower volume per session.
Mobile usage expanded rapidly: average monthly mobile unique users increased 300% year over year to 62.2 million, while aggregate app downloads more than doubled to nearly 36 million. Management continued to invest in social, mobile, international operations, Vacation Rentals, Business Listings and metasearch. China operations continued to operate at a loss.
Key risks include dependence on click-based advertising, advertiser termination rights and pricing, lower smartphone monetization, competition from search engines and online travel agencies, uncertain global and European economic conditions, international expansion and foreign exchange exposure, execution risk from metasearch implementation, debt covenant and refinancing requirements, tax audits, intellectual-property and other litigation, and reliance on Expedia-related revenue. The filing reported no material changes to previously disclosed risk factors, commitments or contingencies.
Other notable items include a $3.7 million foreign-currency translation loss in comprehensive income, $1.5 million of net other expense, and a $0.8 million net gain from foreign-exchange forward contracts. No material off-balance-sheet arrangements were reported. Disclosure controls and procedures were determined to be effective.
Important facts for investors to verify
- Whether metasearch ultimately offsets lower traffic conversion with higher lead quality and pricing.
- The sustainability of revenue growth given the 10% decline in revenue per hotel shopper and the company’s reliance on click-based advertising.
- Expedia’s continuing contribution, which represented 26.3% of Q1 revenue.
- International cash availability, foreign reinvestment plans and any potential U.S. tax cost if foreign earnings are repatriated.
- Term-loan repayment and refinancing capacity, including the $260 million balance scheduled for 2016.
- The effect of rising stock-based compensation and future dilution from outstanding options and RSUs.
- Progress and profitability of China operations and other international growth initiatives.
- Execution of the $250 million repurchase authorization and its interaction with debt covenants and liquidity needs.