Tripadvisor, Inc. Form 10-Q Summary
Reporting period: Three months ended March 31, 2018. The interim consolidated financial statements are unaudited and presented under U.S. GAAP. Tripadvisor operates Hotel and Non-Hotel segments, with Non-Hotel comprising Experiences, Restaurants and Rentals.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $378 million | $372 million | 2% |
| Operating income | $23 million | $27 million | (15%) |
| Net income | $5 million | $13 million | (62%) |
| Diluted EPS | $0.04 | $0.09 | Down |
| Adjusted EBITDA | $80 million | $73 million | 10% |
| Cash flow from operations | $174 million | $134 million | 30% |
| Capital expenditures | $15 million | $18 million | Down |
Margins: Operating margin was approximately 6.1%, compared with 7.3% in Q1 2017. Net margin was approximately 1.3%, compared with 3.5%. Adjusted EBITDA margin was approximately 21.2%, compared with 19.6%. Cost of revenue represented 5.3% of revenue versus 4.6% in the prior-year quarter.
- Segment revenue: Hotel revenue declined 5% to $299 million; Non-Hotel revenue increased 36% to $79 million.
- Segment profitability: Hotel Adjusted EBITDA was $88 million, unchanged year over year, while Non-Hotel Adjusted EBITDA improved to a loss of $8 million from a loss of $15 million.
- Hotel revenue mix: TripAdvisor-branded click-based and transaction revenue declined 10% to $189 million; display-based advertising and subscription revenue increased 9% to $71 million.
- Cash and investments: Cash and cash equivalents were $635 million at March 31, 2018, compared with $673 million at December 31, 2017. Total cash, cash equivalents and marketable securities were $655 million versus $735 million.
- Liquidity: The company reported approximately $1.2 billion of available capacity under its 2015 revolving credit facility, $73 million under its 2016 facility and approximately $34 million under the Chinese facilities.
- Debt: Long-term debt was zero at March 31, 2018, following a net repayment of $230 million under the 2015 Credit Facility. Chinese short-term borrowings were $7 million at a weighted-average rate of 4.98%.
- Share repurchases: The company repurchased 252,650 shares for $10 million during the quarter. The board had authorized up to $250 million; approximately $240 million remained available at March 31, 2018.
Material changes versus the prior comparable period
- Revenue increased modestly, but operating income and net income declined because technology and content, general and administrative, and cost-of-revenue expenses increased.
- Hotel performance weakened primarily because revenue per hotel shopper declined 11% to approximately $0.42, while average monthly unique hotel shoppers remained approximately flat at 447 million. Management cited lower cost-per-click rates, reduced paid online marketing and the shift toward lower-monetizing mobile traffic.
- Management reduced search-engine marketing and other online traffic acquisition costs by $38 million in the Hotel segment, while spending $24 million on television advertising that was not incurred in the prior-year quarter.
- Non-Hotel growth was driven by increased Experiences bookings, restaurant seated diners, bookable supply and operating efficiencies. Rentals revenue remained relatively flat as the business continued shifting from subscriptions to a free-to-list model.
- Operating cash flow increased $40 million, principally from working-capital changes related to Experiences bookings, receivables and taxes, despite an $8 million decline in net income.
- Financing cash use increased to $246 million, primarily because of the $230 million net repayment of the 2015 Credit Facility. Investing cash inflow declined to $28 million from $98 million because of lower sales and maturities of marketable securities.
Guidance, outlook, commentary and unusual items
- Management expects 2018 capital expenditures to be comparable to 2017 levels and believes available liquidity and expected operating cash flow will fund foreseeable needs for at least the next twelve months.
- The company expects seasonally stronger financial performance in the second and third quarters and weaker performance in the first and fourth quarters.
- Management is prioritizing long-term user engagement, mobile product development, bookable supply and the user experience, even where these actions may reduce short-term monetization or profitability.
- Tripadvisor adopted ASC 606 in Q1 2018 using the modified retrospective method. The adoption increased opening retained earnings by $4 million and changed the timing of certain instant-booking revenue, including recognition upon booking rather than traveler stay. The company stated that ongoing annual and quarterly effects are not expected to be material.
- The effective tax rate increased to 76.2% from 48.0%, primarily due to international provisions of the 2017 Tax Act, foreign valuation allowances and stock-compensation shortfalls. The company recorded an additional $5 million of Transition Tax expense during the quarter.
- The IRS has proposed transfer-pricing adjustments for 2009 and 2010 that could increase worldwide income tax expense by an estimated $10 million to $14 million, excluding interest and penalties. The company disputes the adjustments.
- Subsequent to March 31, 2018, the company repurchased an additional 2,329,548 shares for $90 million. As of May 7, 2018, $150 million remained available under the authorization.
- Management reported no material changes to commitments, contingencies or market-risk exposure and stated that disclosure controls and procedures were effective.
Key investor risks
- Dependence on search engines, application marketplaces and a relatively small number of major advertising partners; Expedia and Booking Holdings together represented 43% of 2017 revenue.
- Lower mobile monetization, declining hotel revenue per shopper and competitive pressure on cost-per-click rates.
- Intense competition from online travel agencies, search platforms, metasearch providers, hotel chains, rental platforms and restaurant reservation services.
- Exposure to privacy, cybersecurity, payment-processing, intellectual-property, regulatory and short-term-rental compliance risks.
- Potential volatility in effective tax rates, unresolved IRS and other tax audits, and possible additional liabilities under the Tax Sharing Agreement with Expedia.
- Control by Liberty TripAdvisor Holdings, which held all Class B shares and approximately 57.4% of voting power, potentially limiting other stockholders’ influence over corporate actions.
Facts investors should verify
- Whether Hotel revenue and revenue per hotel shopper stabilize as mobile monetization and the marketing mix evolve.
- Whether continued Experiences and Restaurants growth can offset Hotel weakness and bring Non-Hotel Adjusted EBITDA to profitability.
- The final impact of the 2017 Tax Act, Transition Tax measurements and the IRS transfer-pricing audits.
- The pace and valuation of additional share repurchases and their effect on cash balances and diluted share count.
- Whether the company maintains sufficient liquidity while funding technology, marketing, acquisitions and seasonal working-capital requirements.