TripAdvisor, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The filing is unaudited and compares results with the same periods in 2013. TripAdvisor operates one reportable segment as an online travel research, advertising, subscription, and transaction platform.
Financial Performance and Position
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $354 million | $255 million | $958 million | $732 million |
| Operating income | $84 million | $84 million | $280 million | $266 million |
| Net income | $54 million | $56 million | $190 million | $185 million |
| Diluted EPS | $0.37 | $0.38 | $1.30 | $1.27 |
| Adjusted EBITDA | $119 million | $104 million | $370 million | $326 million |
| Cash flow from operations | Not separately provided | Not separately provided | $326 million | $278 million |
- Q3 revenue increased 39%; nine-month revenue increased 31%.
- Q3 operating margin was approximately 23.7%, compared with 32.9% in the prior-year quarter. Nine-month operating margin was approximately 29.2%, compared with 36.3%.
- Q3 net margin was approximately 15.3%, compared with 22.0%; nine-month net margin was approximately 19.8%, compared with 25.3%.
- Revenue mix for Q3 was $247 million click-based advertising, $35 million display advertising, and $72 million subscription, transaction, and other revenue.
- At September 30, 2014, cash and cash equivalents were $491 million, short-term marketable securities were $85 million, and long-term marketable securities were $38 million.
- Total debt was approximately $346 million, consisting of $310 million under the Term Loan and $36 million under Chinese credit facilities. The company reported compliance with all debt covenants.
- Approximately $199 million was available under the revolving credit facility, net of $1 million of letters of credit, and approximately $14 million was available under Chinese credit facilities.
- Net cash used in investing activities was $145 million, including $284 million of acquisition spending and $55 million of capital expenditures. Net cash used in financing activities was $35 million.
Material Changes Versus Prior Comparable Period
- Click-based advertising revenue increased 31% in Q3 and 25% for the nine-month period, driven by hotel shopper growth of 17% and 16%, respectively, and revenue-per-hotel-shopper growth of 14% and 9%.
- Subscription, transaction, and other revenue increased 106% in Q3 and 76% for the nine-month period, reflecting growth in Business Listings and Vacation Rentals and revenue from 2014 acquisitions.
- Selling and marketing expense increased 64% in Q3 and 50% for the nine-month period. The company spent $19 million in Q3 and $30 million for the nine-month period on a new television campaign.
- Adjusted EBITDA increased 14% in Q3 and 13% for the nine-month period, but operating and net margins declined due to substantially higher selling and marketing costs, increased technology investment, depreciation, and amortization.
- TripAdvisor completed four acquisitions during 2014, including Viator for total purchase consideration of $192 million and Vacation Home Rentals, Tripbod, and Lafourchette for aggregate consideration of $160 million. The purchase price allocations remained preliminary.
- Goodwill increased from $502 million at December 31, 2013 to $728 million at September 30, 2014, primarily from acquisitions. Net intangible assets increased from $52 million to $200 million.
- Cash and cash equivalents increased from $351 million to $491 million, while total cash, cash equivalents, and marketable securities declined from $670 million to $614 million.
- No share repurchases occurred during the quarter. The company had $105 million remaining under its authorized $250 million repurchase program.
- Liberty TripAdvisor Holdings, Inc. held approximately 56.6% of voting power as of September 30, 2014, primarily through ownership of all outstanding Class B common stock.
Guidance, Outlook, Commentary, and Risks
- The filing does not provide quantitative revenue, earnings, or margin guidance.
- Management expects continued investment in international operations, mobile, social initiatives, Business Listings, Vacation Rentals, restaurants, and attractions. Mobile users grew strongly, but smartphone monetization was stated to be less than 20% of desktop monetization.
- Management identifies the third quarter as traditionally the strongest seasonal period and the fourth quarter as historically the weakest.
- The business remains substantially dependent on click-based advertising. Risks include changes in hotel shopper growth, CPC pricing, conversion, advertiser return on investment, search-engine traffic, competition, and traffic mix.
- Display advertising benefited from higher impressions but faced lower pricing. International and emerging-market growth also carried lower monetization rates.
- Transaction businesses increase exposure to privacy, cybersecurity, data protection, payment, and operational risks. The filing specifically notes that security incidents could result in additional costs and adverse effects.
- Other risks include foreign currency movements, variable-rate debt, tax audits and unrecognized tax benefits, acquisition integration, goodwill and intangible-asset valuation, litigation, and regulatory or competitive changes.
- Management stated that available liquidity, expected operating cash flow, marketable securities, and credit facilities should fund ongoing requirements, capital expenditures, growth initiatives, debt obligations, lease obligations, share repurchases, and potential acquisitions for at least the next twelve months.
- The company reported no material changes in commitments and contingencies, no material off-balance-sheet arrangements, and no material changes in risk factors from the 2013 Form 10-K.
Important Facts for Investors to Verify
- Assess whether acquisition-driven subscription and transaction revenue can offset decelerating hotel shopper growth and lower mobile monetization.
- Monitor selling and marketing spending, including television advertising, and its effect on operating and net margins.
- Review the integration, final purchase-price allocations, and performance of Viator, Lafourchette, Vacation Home Rentals, and Tripbod.
- Verify liquidity after acquisition spending, capital expenditures, debt maturities, share repurchases, and the build-to-suit headquarters obligation.
- Evaluate exposure to foreign exchange, variable interest rates, tax audits, unrecognized tax benefits, and the concentration of cash held internationally.
- Review cybersecurity, privacy, and transaction-processing controls as the company expands booking and transaction-based products.
- Consider the voting control held by Liberty TripAdvisor Holdings, Inc. and the potential implications for corporate governance.