Tripadvisor, Inc. quarterly report, Q3 FY2015

TripAdvisor, Inc. Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2015. The interim financial statements are unaudited and prepared under U.S. GAAP. TripAdvisor operates an online travel research and booking platform with Hotel and Other segments, including Attractions, Restaurants and Vacation Rentals. The third quarter is typically the company’s seasonal high.

Financial performance and position

Metric	Q3 2015	Q3 2014	Change	9M 2015	9M 2014	Change
Revenue	$415 million	$354 million	17%	$1,183 million	$958 million	23%
Operating income	$88 million	$84 million	5%	$257 million	$280 million	(8%)
Net income	$74 million	$54 million	37%	$195 million	$190 million	3%
Diluted EPS	$0.51	$0.37	38%	$1.34	$1.30	3%
Adjusted EBITDA	$130 million	$119 million	9%	$379 million	$370 million	2%

Margins: Q3 operating margin was approximately 21.2%, versus 23.7% in the prior-year quarter; nine-month operating margin was approximately 21.7%, versus 29.2%. Q3 net margin was approximately 17.8%, versus 15.3%; nine-month net margin was approximately 16.5%, versus 19.8%. Adjusted EBITDA margin was approximately 31.3% in Q3 and 32.0% for the nine-month period, compared with approximately 33.6% and 38.6%, respectively, in the comparable periods.

Revenue mix: Q3 click-based advertising revenue was $261 million, display advertising was $42 million, and subscription, transaction and other revenue was $112 million. Nine-month amounts were $775 million, $118 million and $290 million, respectively.
Segments: Q3 Hotel revenue increased 8% to $340 million and Other revenue increased 92% to $75 million. Nine-month Hotel revenue increased 13% to $1,003 million and Other revenue increased 143% to $180 million.
Operating drivers: Unique hotel shoppers increased 16% in Q3 and 18% for nine months, but revenue per hotel shopper declined 10% and 5%, respectively. Display impressions sold increased 22% and 14%, while pricing increased 3% and 2%.
Cash flow: Nine-month operating cash flow was $307 million, down from $326 million. Investing cash outflow was $126 million, including $93 million of capital expenditures and $29 million for acquisitions. Financing cash outflow was $61 million.
Liquidity: At September 30, cash and cash equivalents were $567 million, and short- and long-term marketable securities totaled $163 million, for total cash and investments of $730 million. Management reported $708 million of available capacity under the 2015 Credit Facility and approximately $49 million under Chinese credit facilities.
Debt: Total debt was approximately $288 million, consisting primarily of $287 million of long-term debt. The company replaced its prior term loan with a $290 million borrowing under a new five-year, $1 billion unsecured revolving facility. The borrowing carried an interest rate of approximately 1.50% at quarter-end and is subject to periodic resets.
Balance sheet: Total assets were $2.198 billion and stockholders’ equity was $1.326 billion at September 30, 2015. Accounts receivable increased to $224 million from $151 million at year-end 2014, while deferred merchant payables increased to $142 million from $93 million.

Material changes versus the prior comparable period

Revenue growth was led by the Other segment and by the 2014 acquisitions of Viator and Lafourchette, which contributed incremental revenue of approximately $29 million in Q3 and $82 million for the nine-month period.
Cost growth exceeded revenue growth in several areas. Q3 selling and marketing expense increased 24% to $197 million, while nine-month selling and marketing expense increased 41% to $546 million. The company incurred $21 million of television advertising expense in Q3 and $50 million for the nine-month period.
Amortization of intangible assets increased to $10 million in Q3 and $26 million for nine months, compared with $6 million and $11 million, respectively, primarily due to acquired businesses.
Operating income declined for the nine-month period despite higher revenue, reflecting increased marketing, personnel, technology, acquisition-related and amortization costs.
Net income benefited from a $17 million gain on the sale of a Chinese subsidiary and a lower effective tax rate. The effective tax rate was 24.5% in Q3 and 26.4% for nine months, compared with 28.0% and 28.8% in the prior-year periods.
The company completed three acquisitions during the nine months for total consideration of $28 million and sold a Chinese subsidiary for $28 million in cash consideration, including $3 million held back for short-term contingencies.

Outlook, commentary, risks and unusual items

Management expects continued investment in mobile products, international expansion, content, Business Listings, Attractions, Restaurants and Vacation Rentals. Mobile visitors are growing faster than overall visitors, but mobile monetization remains materially lower than desktop and tablet monetization.
TripAdvisor accelerated the rollout of its instant-booking feature across U.S. and U.K. platforms and all devices in Q3. Management stated that instant booking currently generates lower revenue per hotel shopper than metasearch and may adversely affect click-based advertising revenue if monetization does not improve.
Foreign currency was a significant headwind. On a constant-currency basis, Q3 revenue would have been approximately $442 million and nine-month revenue approximately $1.263 billion, versus reported revenue of $415 million and $1.183 billion.
Key disclosed risks include competition from search companies and online travel agencies, dependence on click-based advertising, pricing pressure, lower mobile monetization, foreign exchange volatility, seasonality, cybersecurity and consumer-data protection, regulatory and tax matters, and the ability to integrate and grow acquired businesses.
The IRS is examining multiple tax years, including transfer-pricing matters for 2009 and 2010. Proposed adjustments had been notified, but no material assessments had resulted as of September 30, 2015. The company believes its transfer-pricing position is sustainable and intends to defend it.
The company’s corporate headquarters lease is accounted for as a financing obligation. Aggregate future minimum lease payments were $143 million, beginning in November 2015, with the lease running through December 2030 unless extended.
Subsequent events included the appointment of Ernst Teunissen as CFO effective November 9, 2015, and an amended separation arrangement for outgoing CFO Julie Bradley, including continued salary, a prorated bonus of approximately $187,000 and specified equity acceleration provisions.
Management stated that disclosure controls were effective, there were no material changes in internal control over financial reporting, and the company was in compliance with its debt covenants.

Important facts for investors to verify

Whether hotel shopper growth can offset declining revenue per hotel shopper and the lower monetization associated with mobile traffic and instant booking.
The sustainability of Hotel segment margins as marketing, traffic-acquisition, personnel and technology costs continue to increase.
The contribution, profitability and required investment of Viator, Lafourchette, Vacation Rentals and other Other-segment businesses.
The impact of foreign exchange movements, particularly the weaker Euro, on reported revenue, CPC pricing and international growth.
The outcome and potential financial exposure from IRS transfer-pricing examinations and other tax audits.
Future cash requirements for capital expenditures, the headquarters financing obligation, acquisitions, share repurchases and debt service.
The company’s non-GAAP Adjusted EBITDA definition and reconciliation to GAAP results, particularly its exclusion of stock-based compensation, depreciation, amortization, taxes and interest.
The reliability and comparability of internally generated traffic, hotel-shopper and mobile-user metrics, which management states are subject to methodological limitations and are not independently verified.