Tripadvisor, Inc. annual report, FY2018

Tripadvisor, Inc. — FY2018 Form 10-K Summary

Business context and reporting period

Tripadvisor, Inc. operates a global online travel platform connecting consumers with travel content, price comparison, advertising, reservations and booking services. Its principal offerings are reported in two segments: Hotel and Non-Hotel, comprising Experiences, Restaurants and Rentals. The filing covers the fiscal year ended December 31, 2018; it is not a quarterly filing, although fourth-quarter results are disclosed.

TripAdvisor recorded approximately 490 million average monthly unique visitors during its 2018 seasonal peak.
The Hotel segment represented 72% of consolidated revenue, down from 77% in 2017.
The Non-Hotel segment represented 28% of revenue, up from 23% in 2017.
Expedia and Booking together contributed approximately 37% of consolidated revenue, creating significant partner concentration.

Financial performance and key metrics

Metric	2018	2017	Change
Revenue	$1.615 billion	$1.556 billion	4%
Operating income	$183 million	$124 million	48%
Operating margin	11.3%	8.0%	Up 3.3 percentage points
Net income (loss)	$113 million	$(19) million	Improved by $132 million
Diluted EPS	$0.81	$(0.14)	Improved
Adjusted EBITDA	$422 million	$331 million	27%
Adjusted EBITDA margin	26.1%	21.3%	Up 4.8 percentage points
Operating cash flow	$405 million	$238 million	70%
Capital expenditures	$61 million	$64 million	Down $3 million

Net income benefited from the absence of the 2017 Tax Act charges that contributed to the 2017 loss. The 2017 effective tax rate was 117.3%, compared with 34.7% in 2018. Stock-based compensation was $118 million in 2018, up from $96 million, and represented a material non-cash expense.

Segment	2018 Revenue	2017 Revenue	2018 Adjusted EBITDA	2018 Margin
Hotel	$1.157 billion	$1.196 billion	$356 million	31%
Non-Hotel	$458 million	$360 million	$66 million	14%

Hotel revenue declined 3%, primarily due to lower click-based and transaction revenue and lower revenue from non-TripAdvisor-branded sites.
Non-Hotel revenue increased 27%, driven by Experiences and Restaurants; Rentals revenue declined because of competition and resource reallocation.
Hotel shoppers decreased 4% and revenue per hotel shopper decreased 2% for the year, reflecting lower paid traffic acquisition and mobile mix.
Selling and marketing expense decreased 8% to $778 million; reported advertising expense was $544 million, versus $629 million in 2017.

Liquidity, debt and cash flow

Cash, cash equivalents and marketable securities totaled $670 million at December 31, 2018, compared with $735 million at year-end 2017.
The company had no outstanding borrowings at year-end, compared with $230 million of long-term debt and approximately $7 million of Chinese facility borrowings at year-end 2017.
Approximately $1.2 billion remained available under the 2015 revolving credit facility, which matures in May 2022; approximately $40 million was available under Chinese credit facilities.
Operating cash flow of $405 million funded capital expenditures, acquisitions and other investments, debt repayment and $100 million of share repurchases.
Tripadvisor repatriated $325 million of foreign earnings, primarily to repay outstanding debt.
The company had $193 million of net property lease commitments, $19 million of purchase obligations and $31 million of remaining Transition Tax liability. Unrecognized tax benefits and related interest totaling approximately $148 million were excluded from the contractual obligations table because payment timing could not be reliably estimated.

Material changes versus the prior comparable period

Revenue growth moderated to 4%, but operating income and Adjusted EBITDA increased substantially as management reduced lower-return paid marketing and improved Hotel segment efficiency.
Hotel segment revenue declined while Hotel Adjusted EBITDA increased 24% to $356 million, expanding the segment margin from 24% to 31%.
Non-Hotel revenue growth accelerated the business mix toward Experiences and Restaurants, while Rentals continued to face competitive pressure.
Operating cash flow increased $167 million, primarily from higher net income and favorable working-capital movements.
The company moved from $230 million of year-end debt to no outstanding borrowings, while reducing share repurchases from $250 million in 2017 to $100 million in 2018.
Fourth-quarter revenue was $346 million versus $321 million in the fourth quarter of 2017; fourth-quarter operating income was $23 million versus $9 million, and net income was $7 million versus an $84 million loss. The 2017 fourth-quarter loss included $73 million of Tax Act-related charges.
The company adopted ASC 606 in 2018 using the modified retrospective method, recording a $4 million increase to opening retained earnings. Management stated that the ongoing consolidated impact was not material.

Guidance, outlook, commentary and risks

The filing does not provide quantitative revenue, earnings or margin guidance. Management emphasized a strategy of long-term, profitable growth through improved consumer engagement, product development, expanded bookable supply, and deeper relationships with travel partners. Management expects seasonality to remain significant, with the second and third quarters generally strongest.

Management expects continued investment in technology, mobile products, brand advertising and Non-Hotel offerings. Mobile traffic monetizes at a lower rate than desktop and tablet traffic.
Management deliberately reduced lower-return marketing, acknowledging that this slowed or reduced Hotel shopper growth in the near term while improving profitability.
Key risks include dependence on Google and other search or app platforms, intense competition from Google, Booking, Expedia, Airbnb and others, and reliance on Expedia and Booking for a substantial portion of revenue.
Advertising agreements are generally terminable at will or on short notice, and reduced advertiser spending or lower CPC bids could materially affect revenue.
Privacy, data protection, cybersecurity, payment processing, tax, competition and short-term-rental regulations could increase costs or restrict operations. GDPR became effective in the European Union during 2018.
The company is subject to ongoing tax audits. Proposed IRS transfer-pricing adjustments for 2009 and 2010 could increase worldwide income tax expense by an estimated $10 million to $14 million, excluding interest and penalties.
LTRIP beneficially controlled approximately 57.7% of voting power through its ownership of Class B shares, creating controlling-stockholder and corporate-governance risks.
The company expects adoption of ASC 842 lease accounting on January 1, 2019 to add material right-of-use assets and lease liabilities but stated that the effect on operating results and cash flow would not be material.
No goodwill or intangible-asset impairment was recorded for 2018. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.

Most important facts for investors to verify

Whether Hotel shopper declines and lower revenue per shopper stabilize or continue as marketing and product strategies evolve.
Whether Experiences and Restaurants can sustain growth and offset Rentals weakness and Hotel revenue pressure.
Revenue and CPC trends with Expedia and Booking, which together represented approximately 37% of 2018 revenue.
Conversion of strong Adjusted EBITDA and operating cash flow into sustainable GAAP earnings after stock-based compensation, taxes and required investment.
The outcome and timing of IRS transfer-pricing and other tax audits, including potential liabilities beyond the company’s recorded reserves.
The effect of Google, mobile-platform and competitive changes on traffic acquisition costs, user engagement and monetization.
Future capital allocation, including the remaining $150 million share-repurchase authorization, acquisitions and the company’s decision not to pay dividends.