TripAdvisor, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. The filing contains unaudited consolidated results under GAAP. TripAdvisor operates online travel platforms across Hotel and Non-Hotel segments, including Experiences, Restaurants and Rentals. Results are seasonally strongest in the second and third quarters.
Financial Performance and Position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|
| Revenue | $458 million | $439 million | $1,269 million | $1,235 million |
| Operating income | $89 million | $42 million | $160 million | $115 million |
| Net income | $69 million | $25 million | $105 million | $65 million |
| Diluted EPS | $0.49 | $0.18 | $0.75 | $0.46 |
| Adjusted EBITDA | $146 million | $95 million | $335 million | $269 million |
| Operating cash flow | Not separately provided | Not separately provided | $374 million | $220 million |
- Q3 revenue increased 4%; nine-month revenue increased 3%.
- Q3 operating margin was approximately 19.4%, compared with 9.6% in the prior-year quarter. Nine-month operating margin was approximately 12.6%, compared with 9.3%.
- Q3 net margin was approximately 15.1%, compared with 5.7%; nine-month net margin was approximately 8.3%, compared with 5.3%.
- Q3 Adjusted EBITDA margin was approximately 31.9%, compared with 21.6%. Nine-month Adjusted EBITDA margin was approximately 26.4%, compared with 21.8%.
- Cash, cash equivalents and restricted cash totaled $663 million at September 30, 2018, versus $673 million at December 31, 2017. Including marketable securities, total available cash and securities were $663 million at September 30, 2018 versus $735 million at year-end 2017.
- Net cash provided by operating activities increased 70% to $374 million, driven by higher net income, non-cash expenses and favorable working-capital movements.
- Capital expenditures were $45 million for the first nine months, compared with $50 million in the prior-year period. Investing cash flow was negative $18 million, including $24 million for acquisitions and other investments.
- TripAdvisor had no outstanding borrowings under its $1.2 billion 2015 revolving credit facility or its Chinese credit facilities at September 30, 2018. Approximately $1.2 billion and $40 million, respectively, remained available, subject to facility terms. The company was in compliance with debt covenants.
Segment Results and Material Changes
| Segment | Q3 2018 Revenue | Change | 9M 2018 Revenue | Change |
|---|
| Hotel | $305 million | Down 2% | $917 million | Down 4% |
| Non-Hotel | $153 million | Up 20% | $352 million | Up 24% |
- Hotel Adjusted EBITDA increased 94% in Q3 to $99 million and 24% for the nine months to $276 million. Margin improved to 32% in Q3 and 30% for the nine months, primarily because of lower paid online marketing and traffic-acquisition costs.
- Hotel click-based and transaction revenue declined 1% in Q3 and 6% for the nine months. Average monthly unique hotel shoppers declined 5% in Q3 and 2% for the nine months, while revenue per hotel shopper increased 5% in Q3 but declined 2% year to date.
- Hotel display-based advertising and subscription revenue grew 7% in both periods, while other Hotel revenue declined 27% in Q3 and 13% for the nine months.
- Non-Hotel growth was driven principally by Experiences and Restaurants, including higher bookings, seated diners, bookable supply and mobile bookings. Rentals revenue declined because of competition and migration from subscription listings to the free-to-list model.
- Consolidated selling and marketing expense declined 17% in Q3 and 9% for the nine months, reflecting reduced search-engine marketing and online traffic acquisition costs. This was partly offset by increased television advertising and Non-Hotel marketing.
- Technology and content expense increased 18% in Q3 and 13% for the nine months, primarily to support Non-Hotel growth. Stock-based compensation expense increased to $90 million for the nine months from $72 million.
- The company adopted ASC 606 in the first quarter of 2018 using the modified retrospective method. The cumulative increase to opening retained earnings was $4 million. The reported impact on 2018 revenue was not material overall, although quarterly and year-to-date effects differed.
Liquidity, Outlook and Management Commentary
- Management stated that available cash and securities, expected operating cash flow and available credit capacity should fund foreseeable working capital, capital expenditures, growth initiatives, debt obligations, leases and other commitments for at least the next twelve months.
- Management expected total 2018 capital expenditures to be comparable to 2017 spending levels. The filing does not provide formal revenue or earnings guidance.
- The company is prioritizing product improvements, mobile user experience, bookable Experiences and Restaurants supply, and longer-term user engagement. More than half of average monthly unique visitors accessed the platform through mobile phones, which monetize at a significantly lower rate than desktop and tablet traffic.
- TripAdvisor reported approximately 490 million monthly unique visitors in Q3, approximately 702 million reviews and opinions, and listings covering approximately 8.0 million places to stay, eat and visit. These are internal operating metrics and are not independently verified.
- The board authorized $250 million of share repurchases. TripAdvisor repurchased 2.6 million shares for $100 million during the nine months, leaving $150 million authorized at September 30; no shares were repurchased in Q3.
Risks, Contingencies and Unusual Items
- Key risks include reliance on search engines and application marketplaces, competition from OTAs and large technology platforms, dependence on advertising partners, lower mobile monetization, changes in travel demand, foreign exchange volatility, cybersecurity and privacy requirements, and regulatory restrictions affecting Rentals.
- Expedia and Booking Holdings and their subsidiaries represented a combined 43% of 2017 revenue. Advertising contracts generally may be terminated by partners at will or on short notice.
- The IRS proposed transfer-pricing adjustments related to 2009 and 2010 tax years that could increase worldwide income tax expense by an estimated $10 million to $14 million, excluding interest and penalties. TripAdvisor disagrees and intends to defend its position.
- The company recorded a $2 million Transition Tax expense in both Q3 and the first nine months. The remaining unpaid Transition Tax was $31 million at September 30, 2018 and is payable over eight years.
- TripAdvisor has recorded income tax benefits based on prior favorable Altera Tax Court authority concerning stock-based compensation in intercompany cost-sharing arrangements. The Ninth Circuit decision was withdrawn for rehearing, creating potential for future tax expense if the position is rejected.
- Ordinary-course legal, intellectual-property, regulatory and tax matters are pending. Management does not expect current proceedings to have a material adverse effect, but acknowledges that outcomes could differ materially from estimates.
- The company plans to adopt the new lease accounting standard on January 1, 2019. It expects recognition of right-of-use assets and lease liabilities, but had not finalized the quantitative impact as of the filing date.
Investor Verification Checklist
- Verify whether Hotel revenue and hotel-shopper trends stabilize while Non-Hotel growth continues.
- Assess whether reduced paid marketing is producing durable revenue-per-shopper and margin improvements without impairing traffic growth.
- Monitor mobile monetization, search-engine dependence and the concentration of revenue among major advertising partners.
- Review cash conversion, seasonal working-capital movements and the sustainability of the $374 million year-to-date operating cash flow.
- Track share repurchases, remaining authorization and the effect of stock-based compensation and equity dilution.
- Follow the IRS transfer-pricing audit, Altera litigation and remaining Tax Cuts and Jobs Act measurement uncertainties.
- Evaluate the financial statement effects of lease accounting adoption beginning January 1, 2019.
