Tripadvisor, Inc. 2011 Form 10-K Summary
Business context and reporting period
This filing covers the fiscal year ended December 31, 2011, including quarterly information for the fourth quarter. TripAdvisor operated as an online travel research and advertising platform with more than 60 million reviews, over 20 million members and more than 50 million monthly unique visitors in January 2012. Expedia completed the Spin-Off on December 20, 2011, and TripAdvisor began trading independently on NASDAQ under “TRIP” on December 21, 2011.
Results before December 21, 2011 are presented on a combined basis reflecting the business transferred from Expedia; results thereafter are consolidated. Consequently, historical results may not represent the expenses or cash flows TripAdvisor would have incurred as a standalone company.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenue | $637.1 million | $484.6 million | +31% |
| Operating income | $272.8 million | $226.3 million | +21% |
| Operating margin | 42.8% | 46.7% | Down 3.9 points |
| Net income attributable to TripAdvisor | $177.7 million | $138.8 million | +28% |
| Diluted EPS | $1.32 | $1.04 | +27% |
| Adjusted EBITDA | $322.9 million | $261.0 million | +24% |
| Net cash from operating activities | $217.9 million | $196.9 million | +11% |
The filing separately reports $426.0 million of non-related-party revenue and $211.0 million of related-party revenue from Expedia. Revenue by product was approximately $500 million from click-based advertising, $86 million from display advertising and $51 million from subscription, transaction and other sources. Expedia represented approximately 33% of total revenue.
Fourth-quarter 2011 revenue was $137.8 million, operating income was $33.6 million and net income attributable to TripAdvisor was $22.0 million. The fourth quarter was seasonally weaker than the third quarter, consistent with management’s historical pattern.
At December 31, 2011, cash and cash equivalents were $183.5 million, compared with $93.1 million at year-end 2010. Working capital was $147.9 million. Total assets were $835.9 million and stockholders’ equity was $293.5 million.
Material changes versus the prior comparable period
- Click-based advertising revenue increased 30%, driven primarily by a 29% increase in monthly visits to TripAdvisor-branded sites and higher average cost-per-click pricing.
- Subscription, transaction and other revenue increased 76%, reflecting growth in Business Listings and a full year of revenue from Holiday Lettings.
- Selling and marketing expense increased 49%, particularly due to search-engine marketing and traffic acquisition costs. Total operating expenses increased 41%, faster than revenue, reducing the operating margin.
- Technology and content expense increased 33% as the company expanded internationally, enhanced site features and invested in mobile products.
- Amortization of intangible assets declined 49% to $7.5 million, primarily because certain technology intangibles and contingent purchase consideration were substantially amortized.
- Spin-Off costs of $6.9 million and approximately $8 million of stock-based award modification charges were recorded in 2011 and are unusual items associated with separation from Expedia.
- Mobile usage expanded substantially, reaching approximately 13 million application downloads and 16 million monthly unique mobile users at year-end, compared with 2 million downloads and 4 million monthly users at the end of 2010.
Debt, liquidity, outlook and risks
In connection with the Spin-Off, TripAdvisor entered into a $400 million five-year term loan due December 2016 and a $200 million revolving credit facility. At year-end, $380 million of the term loan was classified as long-term debt, $20 million as current debt, and $10 million was drawn under the revolving facility. The company also had approximately $16.7 million outstanding under a Chinese credit facility. The debt is generally variable-rate; management estimated that a 25-basis-point rate change on the term loan would affect annual interest expense by approximately $1 million.
Principal payments on the term loan are scheduled to total $20 million in 2012, $40 million in each of 2013 through 2015 and $260 million in 2016. The company reported compliance with its debt covenants and stated that cash, expected operating cash flow and revolving availability should fund operations, capital expenditures, debt obligations and growth initiatives for at least the next 12 months.
Expedia expected to reduce its cost-per-click pricing by 10% to 15% from 2011 levels. Management expected this reduction to lower TripAdvisor’s 2012 total revenue by approximately 5%, without assuming replacement revenue from other advertisers. The post-Spin-Off commercial arrangements with Expedia generally have terms of up to one year.
- Revenue is highly dependent on advertising, click-based pricing and a relatively small number of advertisers, particularly Expedia.
- Changes in search-engine algorithms, search disintermediation by Google or other platforms, and rising traffic acquisition costs could reduce traffic or monetization.
- Mobile usage was growing faster than overall usage, but mobile monetization remained limited; the company did not fully monetize smartphone traffic.
- Travel-industry weakness, advertiser budget reductions, competition, fraudulent or low-quality user-generated content, privacy and data-security incidents, and regulatory changes could adversely affect results.
- China operations were loss-making and subject to regulatory, contractual and foreign-exchange risks.
- The company had $13 million of unrecognized tax benefits, $258 million of foreign earnings intended to remain permanently reinvested, and potential tax-sharing and indemnification obligations related to the Spin-Off.
- Barry Diller effectively controlled approximately 62.4% of voting power through the dual-class share structure and arrangements with Liberty Interactive. The company relied on NASDAQ’s controlled-company governance exemptions.
- The filing states that disclosure controls were effective, but no management assessment or auditor attestation of internal control over financial reporting was included because of the SEC transition period for newly public companies.
Most important facts for investors to verify
- Whether Expedia’s lower CPC pricing and the expiration or renewal of post-Spin-Off commercial agreements produce the anticipated 2012 revenue impact.
- The pace of diversification away from Expedia and other large advertisers.
- Operating-margin performance after elevated traffic acquisition, international expansion, standalone-company and public-company costs.
- Cash generation, variable-rate debt costs, covenant compliance and the ability to refinance or repay the substantial 2016 maturity.
- Mobile and vacation-rental monetization, including whether user growth converts into sustainable revenue.
- The effect of search-engine competition, privacy regulation, data-security events and content-quality issues on traffic and advertiser demand.
- The tax-sharing agreement, Spin-Off indemnities, restrictions on equity transactions through January 21, 2014, and potential tax exposure relating to foreign earnings.
- Potential dilution from approximately 6.6 million options, 8.0 million warrant shares and outstanding restricted stock units.