TripAdvisor, Inc. 2012 Q2 Form 10-Q Summary
Business Context and Reporting Period
TripAdvisor operates an online travel research and advertising platform offering reviews, travel content, booking links and related services across TripAdvisor and other travel brands. Revenue is derived primarily from click-based and display advertising, with additional subscription, transaction and content-licensing revenue. The filing covers the quarter and six months ended June 30, 2012. TripAdvisor completed its spin-off from Expedia in December 2011; 2011 comparative results are combined/predecessor results and may not fully represent standalone-company costs.
- TripAdvisor-branded sites averaged more than 54 million monthly unique visitors in the quarter.
- The platform had more than 32 million marketable members and more than 75 million reviews and opinions.
- Management identified the third quarter as historically the strongest seasonal period and the fourth quarter as the weakest.
Financial Performance and Key Metrics
| Metric | Q2 2012 | Q2 2011 | Change |
|---|---|---|---|
| Total revenue | $197.1 million | $169.2 million | 16% |
| Operating income | $83.7 million | $83.8 million | Flat |
| Operating margin | 42.4% | 49.5% | Down 7.1 points |
| Net income attributable to TripAdvisor | $53.0 million | $54.1 million | Down 2% |
| Diluted EPS | $0.37 | $0.41 | Down 10% |
| Adjusted EBITDA | $96.9 million | $92.5 million | 5% |
- Six-month revenue was $380.9 million, up 20%; operating income was $157.1 million, essentially flat; net income attributable to TripAdvisor was $101.1 million, approximately flat; and diluted EPS was $0.73 versus $0.76.
- Q2 revenue consisted of approximately $151 million of click-based advertising, $27 million of display advertising and $19 million of subscription, transaction and other revenue. Click-based revenue increased 13%, while subscription, transaction and other revenue increased 59%.
- Core cost-per-click revenue represented 77% of Q2 revenue and 78% of six-month revenue, compared with 79% and 80%, respectively, in the prior-year periods.
- Hotel shoppers increased approximately 30% in Q2 and more than 30% for the six-month period, but clicks per hotel shopper and revenue per click declined.
- Six-month net cash provided by operating activities was $91.5 million versus $113.9 million. Capital expenditures were $13.2 million, and cash used in investing activities was $6.2 million.
- Cash and cash equivalents increased to $478.2 million at June 30, 2012 from $183.5 million at December 31, 2011, primarily due to equity warrant and option exercise proceeds.
- Cash flow from financing activities was $212.4 million, including $225.8 million from equity awards and warrant exercises, partly offset by $10.0 million of term-loan principal payments and $10.0 million of revolving-facility repayments.
Material Changes Versus the Prior Comparable Period
- Revenue growth was offset by substantially higher operating costs: selling and marketing increased 22% in Q2 and 36% year to date; technology and content increased 61% and 49%; and general and administrative expense increased 130% and 114%.
- Operating margin declined because investments in traffic acquisition, headcount, technology, mobile, social initiatives, international expansion and standalone public-company infrastructure outpaced revenue growth.
- Stock-based compensation increased to $6.8 million in Q2 and $11.5 million year to date, versus $2.0 million and $4.4 million in the prior-year periods.
- Interest expense and other expense increased following the spin-off and new debt structure. Q2 total other expense was $6.9 million versus $0.7 million of other income in the prior-year period.
- The effective tax rate declined to 30.7% in Q2 and 31.5% year to date from 36.0% and 36.1%, primarily because of increased earnings in lower-tax foreign jurisdictions.
- Related-party Expedia revenue declined 6% in Q2 and 5% year to date and represented 28.3% and 28.2% of revenue, down from 35.0% and 35.5%. Expedia shared-services fees ended after the spin-off.
Debt, Liquidity, Outlook and Risks
- Debt at June 30, 2012 included $390.0 million outstanding under the term loan, consisting of $30.0 million current and $360.0 million long term, plus $24.4 million of Chinese short-term credit facilities. No revolving credit borrowings were outstanding.
- The term loan and revolving facility mature in December 2016. Scheduled term-loan principal payments total $10 million in 2012, $40 million annually in 2013 through 2015, and $260 million in 2016.
- Management stated that cash, expected operating cash flow and the $200 million revolving facility should fund working capital, capital expenditures, growth initiatives, debt obligations and acquisitions for at least the next 12 months. Management also stated that debt covenants were satisfied at June 30, 2012.
- Expedia’s CPC pricing reduction, rolled out during the fourth quarter of 2011, trended toward the upper end of the expected 10% to 15% discount range. Management expected this to reduce 2012 total revenue by approximately 5%.
- Management continued to invest in mobile, social, international expansion, vacation rentals, Business Listings, SniqueAway and Tingo. Mobile monetization was intentionally below its potential to prioritize user engagement.
- Key risks include dependence on advertising and CPC pricing, concentration of revenue from Expedia, increasing competition from search companies and online travel agencies, lower mobile monetization, global economic weakness including Europe, foreign-currency exposure, Chinese operations that continue to operate at a loss, seasonality and debt-covenant or refinancing risk.
- The company was subject to IRS, state and foreign tax audits; no material assessments had resulted as of June 30, 2012. Management reported no material changes to commitments, contingencies or off-balance-sheet arrangements.
- Ordinary-course litigation includes intellectual-property, defamation and other claims. Management believed no pending matter was likely to exceed the SEC materiality threshold, while noting that unknown claims could adversely affect results.
Investor Verification Items
- Verify whether revenue growth can continue despite lower CPC pricing, declining revenue per click and the expected Expedia-related revenue headwind.
- Monitor operating-margin recovery as investments in marketing, technology, mobile, international operations and standalone-company infrastructure mature.
- Assess the sustainability and quality of the $478.2 million cash balance, including the $225.8 million one-time-like inflow from warrant and option exercises and cash held for permanent reinvestment outside the United States.
- Review the term-loan amortization schedule, variable interest rates, covenant compliance and the large $260 million maturity scheduled for 2016.
- Evaluate Expedia concentration and the duration and economics of the parties’ one- to three-year commercial agreements.
- Track stock-based compensation, equity dilution, outstanding options and future dilution from the 2011 Incentive Plan.
- Consider the comparability limitations created by the December 2011 spin-off and predecessor-period cost allocations.