Tripadvisor, Inc. 2012 Q1 Form 10-Q Summary
Business context and reporting period
TripAdvisor reported its first quarter ended March 31, 2012 as an independent public company following its December 2011 spin-off from Expedia. Pre-spin-off comparative results are presented on a combined basis and may not reflect all costs that would have been incurred as a standalone company.
The company operates an online travel research and advertising platform across TripAdvisor and 19 other travel brands. Revenue is derived primarily from click-based and display advertising, with additional subscription, transaction and content-licensing revenue. TripAdvisor has one reportable segment.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $183.7 million | $149.2 million | 23% |
| Core revenue, excluding Expedia-related revenue | $132.1 million | $95.3 million | 39% |
| Expedia-related revenue | $51.6 million | $53.9 million | (4%) |
| Operating income | $73.4 million | $73.3 million | Flat |
| Operating margin | 40.0% | 49.1% | Down 9.1 percentage points |
| Net income attributable to TripAdvisor | $48.1 million | $47.3 million | 2% |
| Net margin attributable to TripAdvisor | 26.2% | 31.7% | Down 5.5 percentage points |
| Diluted EPS | $0.35 | $0.35 | Flat |
| Adjusted EBITDA | $84.2 million | $82.0 million | 3% |
| Adjusted EBITDA margin | 45.8% | 55.0% | Down 9.2 percentage points |
| Net cash provided by operating activities | $29.7 million | $53.3 million | Down $23.6 million |
| Capital expenditures | $7.3 million | $5.0 million | Up $2.3 million |
Click-based advertising revenue increased 20% to approximately $145 million, primarily driven by more than 30% growth in hotel shoppers. Display advertising increased 17% to approximately $22 million, while subscription, transaction and other revenue increased 67% to approximately $17 million, primarily due to Business Listings.
Cash and cash equivalents were $208.6 million at March 31, 2012, compared with $183.5 million at December 31, 2011. Operating cash flow was reduced by working-capital movements, including a $26.4 million related-party cash outflow. The company received $7.0 million from Expedia related to the post-spin-off reconciliation.
Total borrowings were approximately $414.6 million at March 31, 2012, consisting primarily of $395.0 million under the term loan and approximately $19.6 million of Chinese short-term borrowings. The company had no outstanding borrowings under its $200 million revolving credit facility at quarter-end. The $400 million term loan matures in December 2016, with $5 million of principal repaid during the quarter. Management stated that the company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue growth was strong, but operating income was essentially unchanged because total costs and expenses increased 45%, compared with 23% revenue growth.
- Selling and marketing expense increased 52%, primarily from search-engine marketing and traffic-acquisition costs.
- Technology and content expense increased 36% due to higher headcount, international expansion, site enhancements and mobile initiatives.
- General and administrative expense increased 98%, reflecting standalone public-company costs, additional hiring, professional fees and a $1.7 million charitable-foundation expense.
- Stock-based compensation increased to $4.7 million from $2.5 million.
- Interest expense increased because of the new term loan and revolving credit facilities established in connection with the spin-off.
- The effective tax rate declined to 32.3% from 36.3%, primarily because of a larger proportion of earnings generated in lower-tax foreign jurisdictions.
- Cash flow from investing activities improved substantially because recurring transfers to Expedia ceased after the spin-off.
Guidance, outlook, commentary and risks
- Expedia’s CPC pricing was expected to decline by 10% to 15%; management stated that the reduction was trending toward the upper end of that range and could reduce 2012 revenue by approximately 5%. Potential replacement revenue from other advertisers was not included in the forward-looking assumptions.
- Management expects to continue investing in social, mobile, international expansion, vacation rentals, Business Listings and other growth initiatives. Mobile usage reached approximately 23 million monthly unique users and 17 million cumulative downloads as of March 31, 2012, but the company was not monetizing mobile to its full potential.
- China remained an investment market in which TripAdvisor continued to operate at a loss. Management also identified increasing competition from search companies and online travel agencies.
- Revenue is seasonal, with the third quarter historically strongest and the fourth quarter weakest. Management noted limited near-term visibility because of uncertain global economic conditions.
- Advertising contracts, particularly click-based arrangements, can generally be terminated by advertisers at will or on short notice. Revenue is sensitive to traffic, hotel shoppers, conversion, CPC pricing, advertiser monetization and changes in attribution models.
- The company stated that no material changes had occurred in commitments, contingencies or risk factors since December 31, 2011. Ordinary-course litigation includes intellectual-property, defamation and other claims; management did not identify any pending matter expected to exceed the SEC disclosure threshold.
- Management believed cash, expected operating cash flow and available revolver capacity would fund working capital, capital expenditures, growth initiatives, acquisitions and debt obligations for at least the next 12 months.
Important facts for investors to verify
- Confirm the effect of Expedia’s CPC pricing reductions on subsequent revenue and the degree to which non-Expedia advertisers offset the decline.
- Monitor whether elevated selling, marketing, technology and standalone-company costs normalize or continue to pressure operating margins.
- Review debt maturities, variable interest rates, covenant compliance and the company’s ability to repay the substantial 2016 term-loan balance.
- Assess operating cash conversion, particularly the impact of receivables and related-party balances with Expedia.
- Evaluate the profitability and required investment of China, mobile, social, international and newer transaction businesses.
- Consider Expedia concentration: Expedia-related revenue represented 28% of total Q1 2012 revenue, although it declined from 36% in Q1 2011.
- Reconcile standalone post-spin-off results with combined historical results when assessing sustainable margins and expenses.