TripAdvisor, Inc. — Q3 2012 Form 10-Q Summary
Business context and reporting period
TripAdvisor operates an online travel research and advertising platform, including TripAdvisor-branded sites in 30 countries and 21 languages, plus 19 other travel brands. Revenue is generated primarily from click-based and display advertising, with additional subscription, transaction and content-licensing revenue.
The filing covers the quarter and nine months ended September 30, 2012. TripAdvisor became an independent public company following its December 2011 spin-off from Expedia. Accordingly, prior-period information is presented on a combined basis, while post-spin-off information is consolidated.
- More than 57 million average monthly unique visitors during the quarter.
- More than 75 million reviews and opinions and over 36 million marketable members.
- More than 26 million mobile downloads and over 35 million monthly mobile unique users as of September 30, 2012.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Total revenue | $212.7 million | $180.8 million | $593.6 million | $499.3 million |
| Operating income | $92.2 million | $82.1 million | $249.3 million | $239.2 million |
| Operating margin | 43.4% | 45.4% | 42.0% | 47.9% |
| Net income attributable to TripAdvisor | $59.4 million | $54.3 million | $160.5 million | $155.7 million |
| Diluted EPS | $0.41 | $0.41 | $1.14 | $1.17 |
| Adjusted EBITDA | $107.1 million | $93.3 million | $288.2 million | $267.8 million |
| Adjusted EBITDA margin | 50.3% | 51.6% | 48.6% | 53.6% |
Q3 revenue increased 18%, operating income increased 12%, net income attributable to TripAdvisor increased 9%, and Adjusted EBITDA increased 15%. For the first nine months, revenue increased 19%, operating income increased 4%, net income increased 3%, and Adjusted EBITDA increased 8%.
Revenue composition for Q3 was approximately $168 million from click-based advertising, $24 million from display advertising, and $21 million from subscription, transaction and other sources. Click-based advertising represented 79% of total revenue in Q3 and 78% for the first nine months.
Cash flow, liquidity and debt
- Cash and cash equivalents were $548.4 million at September 30, 2012, compared with $183.5 million at December 31, 2011. Cash included $225 million held in the United Kingdom that management intends to reinvest permanently outside the United States.
- Operating cash flow was $167.9 million for the first nine months, down from $191.7 million in the prior-year period.
- Investing cash flow was an outflow of $13.6 million, including $20.6 million of capital expenditures and $7.0 million received from Expedia in connection with the spin-off.
- Financing cash flow was $212.5 million, primarily reflecting $226.3 million of proceeds from stock option and warrant exercises, partly offset by $15.0 million of term-loan principal payments and a $10.0 million revolving-facility repayment.
- Outstanding debt consisted of $385.0 million under the term loan and $29.5 million of Chinese credit-facility borrowings. No amounts were outstanding under the $200 million revolving credit facility.
- The term loan matures in December 2016, with $5.0 million due in the remainder of 2012 and $40.0 million due in each of 2013 through 2015; $260.0 million is due in 2016.
- Management stated that the company was in compliance with its debt covenants and expects available cash, operating cash flow and revolver capacity to fund at least the next 12 months of needs.
Material changes versus the prior comparable period
- Core revenue growth was driven primarily by approximately 30% growth in hotel shoppers. Growth was partly offset by fewer clicks per hotel shopper, lower hotel shopper volume during the Olympics, and lower revenue per click.
- Subscription, transaction and other revenue increased 53% in Q3, primarily due to Business Listings growth.
- Expedia-related revenue declined 6% in Q3 and 5% for the first nine months. Its contribution fell to 26.7% and 27.7% of total revenue, respectively, from 33.4% and 34.8%.
- Expedia’s CPC pricing was expected to remain 10% to 15% below prior levels and was expected to reduce TripAdvisor’s 2012 total revenue by approximately 5%.
- Selling and marketing expense increased 12% in Q3 and 27% for the first nine months, while technology and content expense increased 60% and 53%, respectively. General and administrative expense increased 118% and 115%.
- Operating margins declined because investments in personnel, technology, mobile and social initiatives, traffic acquisition, international expansion and standalone public-company infrastructure grew faster than revenue.
- Stock-based compensation increased to $8.5 million in Q3 and $19.9 million for the first nine months, compared with $2.0 million and $6.5 million, respectively.
- Spin-off costs and Expedia shared-services fees were zero in 2012, compared with $2.2 million and $2.0 million in Q3 2011, respectively.
- TripAdvisor issued approximately 3.5 million stock options and exercised all remaining warrants during the first nine months. Warrant exercises generated $214.5 million of cash proceeds, and no warrants remained outstanding at September 30, 2012.
Guidance, outlook, commentary and risks
Management did not provide formal full-year revenue or earnings guidance in the filing. It stated that Expedia CPC pricing was expected to negatively affect 2012 revenue by approximately 5% and that the company expected to continue investing in social, mobile, global, subscription and transaction-based businesses.
- Mobile monetization was intentionally below its potential while management prioritized user engagement and long-term audience growth.
- China remained an investment market in which TripAdvisor operated at a loss.
- Third-quarter results benefit from normal travel-industry seasonality; management identified Q3 as traditionally the strongest quarter and Q4 as the weakest.
- Key risks include competition from search engines and online travel agencies, reliance on advertising and CPC pricing, advertiser contract termination rights, mobile monetization challenges, international and foreign-currency exposure, uncertain global economic conditions, and dependence on Expedia-related commercial arrangements.
- The company began using short-term foreign-exchange forward contracts. These were not designated as hedges and had a September 30 net liability fair value of approximately $0.3 million on $18.3 million of notional exposure.
- Redeemable noncontrolling interest increased to $14.6 million from $3.9 million at year-end. The company expected the final valuation and potential payment to minority holders during the fourth quarter of 2012.
- The company disclosed ordinary-course litigation involving intellectual property, defamation and other claims, but management stated that none of the identified matters was expected to be material. Tax years 2009 through 2011 remained subject to examination, including an IRS audit for 2009 and 2010.
Investor verification priorities
- Verify the sustainability of hotel-shopper growth, click-through conversion and revenue per click after the 2011 site redesign and Olympic-related traffic effects.
- Assess Expedia-related revenue concentration, CPC pricing changes and the effect of expiring or renegotiated commercial agreements.
- Reconcile reported earnings with Adjusted EBITDA, particularly the growing stock-based compensation expense and other excluded items.
- Review margin pressure from marketing, technology, headcount, mobile, social and international investments.
- Confirm debt repayment requirements, variable-rate exposure, Chinese credit-facility maturities and compliance with financial covenants.
- Evaluate the quality and location of cash, including the tax implications of approximately $375 million of indefinitely reinvested foreign earnings.
- Monitor the fourth-quarter valuation and potential settlement of redeemable noncontrolling interests.
- Consider the limited comparability of pre-spin-off combined results with post-spin-off consolidated results.