TripAdvisor, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016. The interim financial statements are unaudited and prepared under U.S. GAAP. TripAdvisor operates an online travel platform built around user reviews, travel planning, price comparison and booking. Reportable segments are Hotel and Non-Hotel, comprising Attractions, Restaurants and Vacation Rentals.
Financial Performance and Liquidity
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $421 million | $415 million | $1,164 million | $1,183 million |
| Operating income | $66 million | $88 million | $156 million | $257 million |
| Net income | $55 million | $74 million | $119 million | $195 million |
| Diluted EPS | $0.37 | $0.51 | $0.81 | $1.34 |
| Adjusted EBITDA | $114 million | $130 million | $294 million | $379 million |
| Cash flow from operations | Not separately provided for the quarter | $277 million | $339 million |
- Q3 revenue increased 1%, while nine-month revenue declined 2%. Operating margin was approximately 15.7% in Q3 and 13.4% for the first nine months, compared with approximately 21.2% and 21.7%, respectively, in the prior-year periods.
- Adjusted EBITDA margin was approximately 27.1% in Q3 and 25.3% for the first nine months, versus 31.3% and 32.0% in the comparable 2015 periods.
- Hotel revenue declined 6% to $320 million in Q3 and 6% to $939 million for the first nine months. Non-Hotel revenue increased 35% to $101 million in Q3 and 25% to $225 million for the first nine months.
- Hotel Adjusted EBITDA declined 18% to $99 million in Q3 and 18% to $309 million year to date. Non-Hotel Adjusted EBITDA was $15 million in Q3, compared with $9 million, but was negative $15 million year to date, compared with $2 million.
- Cash, cash equivalents and marketable securities totaled $756 million at September 30, 2016, compared with $698 million at December 31, 2015. Cash and cash equivalents were $611 million.
- Total debt was $96 million, consisting of $76 million of current debt and $20 million of long-term debt, compared with $201 million at year-end 2015. The company had approximately $978 million of available capacity under the 2015 Credit Facility and approximately $38 million under its Chinese facilities.
- Operating cash flow was $277 million, capital expenditures were $57 million, acquisitions used $23 million, and share repurchases used $21 million during the first nine months.
Material Changes Versus Prior Comparable Period
- Hotel click-based and transaction revenue decreased 10% in Q3 and 13% year to date. Revenue per hotel shopper declined 12% in Q3 and 18% year to date, despite hotel shoppers increasing 3% and 5%, respectively.
- Management attributed lower hotel monetization primarily to the global rollout of instant booking, increased mobile usage, competitive market dynamics and difficult 2015 metasearch comparisons. Instant booking revenue is generally less monetized than metasearch revenue and, under the consumption model, is recognized when a stay is completed.
- Mobile phone and tablet visitors represented more than half of average monthly unique visitors and grew 19% year over year. Mobile monetization remained significantly below desktop and tablet monetization.
- International revenue declined 4% in Q3 and 9% year to date, representing 45% of total revenue in both periods, compared with 47% and 48% in 2015. APAC and Latin America revenue declined particularly sharply.
- Total costs and expenses increased 9% in both Q3 and the first nine months. Technology and content expense increased 15% in Q3 and 22% year to date, while selling and marketing expense increased 7% in both periods.
- The 2015 gain on sale of a Chinese subsidiary, which contributed $17 million to other income in Q3 2015, did not recur. This contributed to the decline in income before taxes and net income.
- The company early adopted ASU 2016-09 on stock compensation. Adoption resulted in a $1 million reduction to opening retained earnings, moved excess tax benefits into income taxes, and reclassified certain cash flows from financing to operating activities.
- TripAdvisor completed acquisitions of Tous Au Restaurant, HouseTrip and CityMaps for total purchase consideration of $27 million. The financial impact was not material individually or in aggregate.
Guidance, Outlook, Commentary and Risks
- The filing does not provide specific quantitative revenue, earnings or margin guidance.
- Management emphasized continued investment in content and community, mobile products, international expansion, instant booking, attractions, restaurants and vacation rentals. Vacation rental listings increased 12% to 830,000 during the first nine months.
- Management expects cash, securities, operating cash flow and available credit facilities to fund working capital, capital expenditures, growth initiatives, debt obligations, potential repurchases and acquisitions for at least the next twelve months.
- The company identified seasonality as significant, with financial results generally strongest in the third quarter and weaker in the first and fourth quarters.
- Key risks include declining revenue per hotel shopper, lower mobile monetization, dependence on search engines and major advertising partners, competition from Google, Expedia, Priceline, Airbnb and others, execution risk related to instant booking, foreign exchange volatility, cybersecurity and privacy risks, regulatory and tax audits, and the effects of Brexit and broader travel-industry conditions.
- The IRS is auditing certain 2009-2010, 2012-2013 and employment-tax periods, and the company faces other state and foreign tax audits. No material assessments had resulted as of September 30, 2016, but final outcomes could materially affect results or cash flows.
- Liberty TripAdvisor Holdings beneficially controlled approximately 56% of voting power through its ownership of Class B common stock, creating governance and control risks for other shareholders.
- The company stated that it was in compliance with debt covenants, had no material off-balance-sheet arrangements and had effective disclosure controls as of September 30, 2016.
Investor Verification Checklist
- Verify whether revenue per hotel shopper and Hotel segment margins recover as instant booking matures and mobile traffic continues to grow.
- Assess the sustainability and quality of Non-Hotel growth, including whether Attractions, Restaurants and Vacation Rentals can reach consistent profitability.
- Review cash generation relative to stock-based compensation, capital expenditures, acquisitions and share repurchases.
- Monitor debt maturities, variable interest rates, the callable and discretionary nature of the 2016 Credit Facility, and compliance with leverage covenants.
- Track outcomes of IRS, state and foreign tax audits, including transfer-pricing matters and potential repatriation taxes on foreign earnings.
- Evaluate dependence on major advertising partners and search platforms, as well as changes in traffic acquisition costs and bidding economics.
- Review the effects of foreign exchange movements, Brexit-related economic uncertainty, privacy regulation and cybersecurity incidents.