Tripadvisor, Inc. 2019 Q3 Form 10-Q Summary
Business context and reporting period
Tripadvisor is an online travel company providing travel content, price comparison, advertising, reservations, and booking services across hotels, experiences, restaurants, rentals, flights, cruises, and related offerings. The filing covers the three and nine months ended September 30, 2019. Beginning in the first quarter of 2019, the company reported two primary segments: Hotels, Media & Platform and Experiences & Dining, with prior periods reclassified for comparability.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $428 million | $458 million | $1,225 million | $1,269 million |
| Operating income | $68 million | $89 million | $164 million | $160 million |
| Net income | $50 million | $69 million | $110 million | $105 million |
| Diluted EPS | $0.36 | $0.49 | $0.78 | $0.75 |
| Adjusted EBITDA | $129 million | $146 million | $347 million | $335 million |
| Operating cash flow | Not separately provided | Not separately provided | $364 million | $374 million |
- Q3 revenue declined 7%, operating income declined 24%, net income declined 28%, and Adjusted EBITDA declined 12% year over year. Nine-month revenue declined 3%, while operating income increased 3%, net income increased 5%, and Adjusted EBITDA increased 4%.
- Approximate margins were 15.9% operating and 11.7% net in Q3 2019, versus 19.4% and 15.1% in Q3 2018. Nine-month operating and net margins were approximately 13.4% and 9.0%, versus 12.6% and 8.3%, respectively.
- Q3 Adjusted EBITDA margin was approximately 30.1%, versus 31.9% in the prior-year quarter. Nine-month Adjusted EBITDA margin was approximately 28.3%, versus 26.4%.
- At September 30, 2019, cash and cash equivalents were $838 million and short-term marketable securities were $95 million, compared with $655 million and $15 million at December 31, 2018.
- Cash flow from operations was $364 million for the first nine months, compared with $374 million in the prior-year period. Capital expenditures were $60 million, versus $45 million.
- The company had no outstanding borrowings under its $1.2 billion revolving credit facility and approximately $1.2 billion of available capacity. It also had $30 million of available capacity under a Chinese facility. The company was in compliance with debt covenants.
- Total liabilities were $820 million and stockholders’ equity was $1.648 billion at September 30, 2019. Adoption of lease accounting resulted in $85 million of operating lease liabilities and $84 million of finance lease liabilities on the balance sheet.
Material changes versus the prior comparable period
- Hotels, Media & Platform revenue decreased 12% in Q3 and 6% for the first nine months, primarily because of lower hotel metasearch auction revenue. TripAdvisor-branded hotels revenue declined 14% in Q3 and 8% year to date.
- Experiences & Dining revenue increased 19% in Q3 and 24% year to date, driven by growth in Experiences and Restaurants bookings, mobile bookings, bookable supply, and restaurant advertising and subscription revenue.
- Other revenue declined 30% in Q3 and 32% year to date, reflecting the elimination of marginal or unprofitable revenue, resource reallocation, and continued competition in Rentals.
- Hotels, Media & Platform Adjusted EBITDA declined 4% in Q3 but increased 18% year to date, supported by lower paid traffic acquisition and television advertising costs. Experiences & Dining Adjusted EBITDA declined 46% in Q3 and fell to negative $1 million for the first nine months as the company increased product, supply, headcount, and marketing investment.
- Selling and marketing expense declined 15% in Q3 and 14% year to date, while technology and content expense increased 6% and 8%, respectively. General and administrative expense increased 28% in Q3 and 7% year to date.
- The company adopted ASC 842 lease accounting on January 1, 2019. The adoption had no material impact on operating results or cash flow, but increased recognized right-of-use assets and lease liabilities.
Outlook, commentary, risks, and unusual items
- The filing does not provide clear quantified quarterly or full-year revenue, earnings, or margin guidance.
- Management expects continued investment in Experiences & Dining to expand supply, bookings, and revenue, prioritizing growth over near-term margin expansion.
- Management identified headwinds from search engines, particularly the increasing prominence of their own hotel products, lower SEO traffic, mobile monetization, foreign currency movements, macroeconomic conditions, and intense competition.
- On November 1, 2019, the board declared a special cash dividend of $3.50 per share, estimated at approximately $490 million, payable December 4, 2019. The company expected to fund it primarily with U.S. cash and, to a lesser extent, foreign cash.
- The company recorded a $15 million cumulative income tax expense in the second quarter related to the Ninth Circuit decision in the Altera litigation concerning stock-based compensation in intercompany cost-sharing arrangements. A rehearing request remained pending, and a reversal could produce a future tax benefit.
- IRS proposed transfer-pricing adjustments for 2009–2013 could increase worldwide income tax expense by an estimated $50 million to $55 million, excluding interest, penalties, and potential transition-tax effects. The company disputes the adjustments.
- France’s 3% digital services tax resulted in an estimated $3 million expense in Q3. Similar measures were being considered in other countries.
- Key risks include dependence on search engines and major advertising partners, competition from Google, Expedia, Booking and others, mobile and traffic monetization, data privacy and cybersecurity, foreign exchange and Brexit uncertainty, tax audits and regulatory changes, seasonality, and Liberty TripAdvisor Holdings’ control of approximately 57.4% of voting power.
Important facts for investors to verify
- Whether hotel metasearch revenue and hotel shopper traffic stabilize despite search-engine competition and reduced paid acquisition.
- Whether Experiences & Dining growth can continue while investments and marketing spending pressure segment profitability.
- The ultimate resolution and cash-tax impact of the IRS transfer-pricing audits and the Altera litigation.
- The effect of the approximately $490 million special dividend on post-dividend liquidity and capital allocation.
- Cash conversion, capital expenditures, lease obligations, deferred merchant payables, and seasonal working-capital effects.
- Revenue concentration with major advertising partners and the continuing influence of Liberty TripAdvisor Holdings.