Business Context and Reporting Period
Tripadvisor, Inc. is an online travel company operating travel research, advertising, metasearch, booking, attractions, restaurant reservations and vacation-rental platforms. The filing is an unaudited Form 10-Q for the quarter and six months ended June 30, 2016. Reportable segments are Hotel and Non-Hotel.
TripAdvisor-branded websites reached 350 million average monthly unique visitors during the quarter. The company reported 385 million reviews and opinions covering 6.6 million places, including 1.035 million hotels and accommodations, 815,000 vacation rentals, 4.1 million restaurants and 690,000 attractions.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2016 | Three Months Ended June 30, 2015 | Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $391 million | $405 million | $743 million | $768 million |
| Operating income | $48 million | $79 million | $90 million | $169 million |
| Net income | $34 million | $58 million | $62 million | $121 million |
| Diluted EPS | $0.23 | $0.40 | $0.42 | $0.83 |
| Adjusted EBITDA | $95 million | $123 million | $180 million | $249 million |
| Cash flow from operations | Not separately provided for the quarter | Not separately provided for the quarter | $357 million | $299 million |
Consolidated operating margin was approximately 12.3% in the second quarter and 12.1% for the first six months, compared with approximately 19.5% and 22.0%, respectively, in the prior-year periods. Adjusted EBITDA margin was approximately 24.3% for the quarter and 24.2% year to date, versus approximately 30.4% and 32.4% in the comparable periods.
- Hotel revenue was $316 million for the quarter, down 8%, and $619 million year to date, down 7%.
- Non-Hotel revenue was $75 million for the quarter, up 21%, and $124 million year to date, up 18%.
- Hotel Adjusted EBITDA was $105 million for the quarter and $211 million year to date, down 16% and 18%, respectively.
- Non-Hotel Adjusted EBITDA was a loss of $10 million for the quarter and $31 million year to date, compared with losses of $2 million and $8 million, respectively.
- TripAdvisor-branded click-based and transaction revenue declined 15% for the quarter and 14% year to date. Revenue per hotel shopper declined 19% in both periods.
- TripAdvisor-branded display-based advertising and subscription revenue increased 6% for the quarter and 8% year to date.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $766 million at June 30, 2016, compared with $614 million at December 31, 2015.
- Short- and long-term marketable securities totaled $125 million, resulting in total cash, cash equivalents and marketable securities of $891 million.
- Operating cash flow increased 19% to $357 million for the six months, supported substantially by working-capital changes, including deferred merchant payables.
- Capital expenditures were $36 million, compared with $54 million in the prior-year period. Net cash used in investing activities was $76 million.
- Net cash used in financing activities was $123 million, including $109 million of repayments under the 2015 Credit Facility and $12 million of share repurchases.
- Debt consisted of $91 million of long-term borrowings and $1 million of short-term Chinese borrowings at June 30, 2016.
- The company reported approximately $907 million of available capacity under its $1 billion revolving credit facility and approximately $49 million under its Chinese credit facilities. It was in compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue declined 3% in both the quarter and year-to-date period, while net income declined 41% and 49%, respectively.
- Profitability weakened because Hotel revenue and monetization declined while technology, content, personnel and traffic-acquisition investments increased.
- Revenue per hotel shopper fell from $0.59 to $0.48 in the quarter and from $0.58 to $0.47 year to date.
- Hotel shoppers increased 3% in the quarter and 6% year to date, but the increase did not offset lower monetization.
- International revenue declined 14% in the quarter and 13% year to date, with international revenue representing 42% and 44% of total revenue, respectively, versus 48% and 49% in the prior-year periods.
- Technology and content expense increased 24% in both the quarter and year-to-date period. Selling and marketing expense increased 5% and 7%, respectively, while general and administrative expense decreased 23% and 6%.
- The company stopped its television advertising campaign in 2016; it had incurred $19 million in the second quarter and $29 million in the first six months of 2015.
Outlook, Management Commentary, Risks and Unusual Items
- Management expects continued investment in mobile products, international expansion, content, instant booking and the Attractions, Restaurants and Vacation Rentals businesses.
- Instant booking was fully rolled out globally on all devices by June 30, 2016. Management stated that it currently monetizes at a lower rate than metasearch and may shift revenue recognition toward the time of stay under the consumption model.
- The company expects its financial results to remain seasonal, with the third quarter generally the strongest period for travel research and trip-taking.
- Management identified competition from search engines, online travel agencies, Airbnb, hotel companies and other travel platforms as a significant risk. Dependence on major advertising partners, including Expedia and Priceline, is also material.
- Mobile users monetize at significantly lower rates than desktop and tablet users. Search-engine algorithm changes, rising traffic-acquisition costs and partner bidding behavior may adversely affect revenue.
- Brexit, foreign-currency volatility, global economic conditions and reduced travel spending could affect demand and international results.
- The company is subject to IRS and other tax audits, including transfer-pricing matters for 2009 and 2010. No material assessment had resulted as of June 30, 2016, but the ultimate outcome could materially affect results or cash flows.
- The company recorded a $2 million tax benefit during the first six months related to the Altera stock-based compensation litigation matter.
- The company plans to adopt new stock-compensation accounting guidance in the third quarter of 2016, including reclassification of certain tax benefits and cash flows and a change in forfeiture accounting.
- Liberty TripAdvisor Holdings beneficially controlled approximately 56% of voting power as of June 30, 2016, creating concentrated voting control and related governance risks.
- Management stated that cash, marketable securities, expected operating cash flow and available credit capacity should fund operations, capital expenditures, growth initiatives, debt obligations, potential repurchases and acquisitions for at least the next twelve months.
Important Facts for Investors to Verify
- Whether Hotel revenue per hotel shopper and instant-booking monetization improve following the global rollout.
- Whether Hotel segment revenue and Adjusted EBITDA stabilize while Non-Hotel businesses scale toward profitability.
- The sustainability and quality of operating cash flow, particularly the contribution from deferred merchant payables and other working-capital movements.
- Future international revenue trends, foreign-exchange effects and the impact of Brexit and broader travel-market conditions.
- Exposure to major advertising and booking partners, traffic-acquisition costs and changes in search-engine algorithms.
- Potential tax liabilities from IRS transfer-pricing audits, foreign earnings and tax-law changes.
- Compliance with revolving-credit covenants, variable interest rates and the company’s future debt-repayment strategy.
- The effect of mobile usage, revenue-recognition timing under consumption-based bookings and the adoption of new accounting standards.