TripAdvisor, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. Financial statements are unaudited and presented under U.S. GAAP.
Business Context
TripAdvisor operates a global online travel platform featuring user reviews, travel research, price comparison and booking services. Reportable segments are Hotel and Non-Hotel, comprising Attractions, Restaurants and Vacation Rentals. The platform had nearly 415 million average monthly unique visitors during the quarter, including approximately half accessing through mobile phones.
Financial Performance and Liquidity
| Metric | Q2 2017 | Q2 2016 | Change |
|---|---|---|---|
| Revenue | $424 million | $391 million | 8% |
| Operating income | $46 million | $47 million | (2%) |
| Net income | $27 million | $34 million | (21%) |
| Diluted EPS | $0.19 | $0.23 | Decrease |
| Adjusted EBITDA | $101 million | $95 million | 6% |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter |
Six-month results: Revenue was $796 million versus $743 million, up 7%; operating income was $73 million versus $89 million, down 18%; net income was $40 million versus $64 million, down 38%; diluted EPS was $0.28 versus $0.44; Adjusted EBITDA was $174 million versus $180 million, down 3%; and operating cash flow was $355 million versus $363 million, down 2%.
- Q2 net margin was approximately 6.4% and operating margin approximately 10.8%, compared with approximately 8.7% and 12.0%, respectively, in Q2 2016.
- Hotel revenue increased 3% to $326 million; Hotel Adjusted EBITDA declined 20% to $84 million, and its margin decreased to 26% from 33%.
- Non-Hotel revenue increased 31% to $98 million; Non-Hotel Adjusted EBITDA improved to $17 million from a $10 million loss, with margin increasing to 17% from negative 13%.
- Selling and marketing expense increased 13% to $229 million in Q2, including $16 million of television campaign costs. Selling and marketing represented 54.0% of revenue versus 51.7% in the prior-year quarter.
- The effective tax rate increased to 38.6% from 22.7% in Q2 and to 42.0% from 22.9% for the six-month period, primarily due to foreign-jurisdiction valuation allowances and stock compensation shortfalls.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $887 million at June 30, 2017, compared with $612 million at December 31, 2016. Cash, cash equivalents and marketable securities totaled $908 million versus $746 million.
- Six-month cash flow included $355 million from operations, $78 million from investing activities and $167 million used in financing activities. Capital expenditures were $35 million.
- Total debt was $267 million, consisting of $260 million of long-term debt under the 2015 Credit Facility and $7 million of Chinese short-term borrowings. The 2016 Credit Facility had no outstanding balance.
- The 2015 Credit Facility was amended to increase commitments from $1.0 billion to $1.2 billion and extend maturity to May 2022. Approximately $937 million remained available at June 30, 2017; borrowings carried a weighted average rate of 2.37%.
- The company repurchased 6.1 million shares for $250 million during the first half, completing the authorized program. Management stated that available liquidity and expected operating cash flow should fund foreseeable requirements for at least the next twelve months.
- Approximately $687 million of cash, cash equivalents and marketable securities were held outside the United States, and approximately $845 million of foreign earnings were considered indefinitely reinvested.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by Non-Hotel businesses, particularly Attractions and Restaurants, while Hotel revenue grew only modestly.
- Hotel profitability declined because of increased search-engine marketing, online traffic acquisition costs and the launch of a television campaign intended to support longer-term traffic and brand growth.
- Hotel shoppers increased 11% in Q2, but revenue per hotel shopper declined 2%, primarily because mobile users monetize at lower rates than desktop and tablet users.
- Non-Hotel profitability improved substantially as revenue growth, free traffic and better paid-marketing efficiency outweighed increased personnel and overhead costs.
- The company borrowed $375 million and repaid $206 million under the 2015 Credit Facility during the first six months, with net borrowings primarily supporting share repurchases.
- Stock-based compensation increased to $28 million in Q2 from $23 million. A modification of the chief executive officer’s 2013 option is expected to generate $5 million of incremental compensation expense over the remaining vesting period.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2017 capital expenditures to be comparable to 2016 levels and believed liquidity was sufficient for at least the next twelve months. No specific revenue or earnings guidance was provided.
- Management planned to continue investing in television, online marketing, mobile products, hotel shopping, bookable supply and Non-Hotel businesses, acknowledging that these investments may reduce near-term marketing efficiency and operating margins.
- Seasonality is significant: revenue and profits are generally strongest in the second and third quarters and weaker in the first and fourth quarters.
- The IRS 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 disagrees and is pursuing administrative remedies.
- Key disclosed risks include dependence on advertising and major advertising partners, search-engine traffic and pricing, mobile monetization, intense competition, travel-industry and macroeconomic conditions, foreign exchange, privacy and cybersecurity, regulatory developments affecting online travel and vacation rentals, and variable-rate debt.
- Liberty TripAdvisor Holdings beneficially controlled approximately 57.6% of voting power, creating controlled-company governance and change-of-control risks.
- The company adopted an Executive Severance Plan effective August 7, 2017, after the reporting period. Benefits generally apply to certain terminations without cause or for good reason and are enhanced around a change in control.
- The company was in compliance with debt covenants and reported no material changes to commitments, contingencies or off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether increased hotel marketing and television spending produces sustainable growth in unpaid traffic, conversion, revenue per hotel shopper and Hotel margins.
- Whether mobile traffic monetization improves sufficiently to offset lower revenue per mobile hotel shopper.
- The sustainability of Non-Hotel revenue and profitability growth, particularly in Attractions and Restaurants.
- The ultimate resolution and potential broader implications of the IRS transfer-pricing audits and proposed adjustments.
- Debt levels, variable interest-rate exposure, covenant compliance and the extent to which future repurchases or investments require additional borrowing.
- The effect of foreign cash restrictions, indefinitely reinvested earnings and potential tax law changes on usable liquidity.
- The accuracy and consistency of internally calculated visitor, hotel-shopper and revenue-per-shopper metrics.