TripAdvisor, Inc. Form 10-Q Summary
Business Context and Reporting Period
TripAdvisor operates an online travel research, comparison and booking platform supported primarily by click-based and display-based advertising, with additional subscription and transaction revenue from Business Listings, Vacation Rentals, Attractions, Restaurants and other offerings. The filing covers the three months ended March 31, 2015, compared with the same period in 2014. Results are unaudited and presented under U.S. GAAP.
- Reportable segments: Hotel and Other.
- TripAdvisor-branded websites averaged 340 million monthly unique visitors during the quarter.
- Mobile monthly unique visitors increased 28% year over year to 148 million; mobile monetization remained below desktop and tablet monetization.
- Historically, the third quarter is the strongest travel-research period and the fourth quarter is the weakest.
Financial Performance and Key Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $363 million | $281 million | 29% |
| Operating income | $90 million | $96 million | (6%) |
| Net income | $63 million | $68 million | (7%) |
| Diluted EPS | $0.43 | $0.47 | (9%) |
| Adjusted EBITDA | $127 million | $122 million | 4% |
| Cash flow from operations | $99 million | $109 million | (9%) |
- Revenue mix: click-based advertising $249 million, display-based advertising $35 million, and subscription, transaction and other revenue $79 million.
- Revenue margins: operating margin was approximately 24.8%, compared with 34.2% in the prior-year quarter; net margin was approximately 17.4%, compared with 24.2%.
- Adjusted EBITDA margin was approximately 35.0%, compared with 43.4%. Hotel Adjusted EBITDA margin declined to 41% from 47%; Other segment margin was negative 12% versus negative 13%.
- Hotel revenue increased 20% to $320 million, while Other revenue increased 187% to $43 million, benefiting substantially from the 2014 Viator and Lafourchette acquisitions.
- Hotel shoppers increased 26%, but revenue per hotel shopper declined 5%, primarily because of foreign-exchange pressure and a higher mix of lower-monetizing mobile traffic.
- International revenue increased 32% to $181 million and represented 53% of total revenue, compared with 51% in the prior-year quarter.
- Selling and marketing expense increased 55% to $157 million, including $10 million for television advertising. Amortization increased to $7 million from $2 million, primarily due to acquired intangible assets.
- Foreign-exchange translation reduced reported revenue. On a constant-currency basis, management estimated revenue would have been $381 million and click-based advertising revenue $263 million.
Cash Flow, Liquidity and Debt
- Cash, cash equivalents and marketable securities totaled $642 million at March 31, 2015, consisting of $505 million of cash and cash equivalents, $118 million of short-term securities and $19 million of long-term securities.
- Cash flow from operations was $99 million. Investing activities used $34 million, including $31 million of capital expenditures and $5 million for acquisitions. Financing activities used $3 million.
- Capital expenditures increased to $31 million from $20 million, including spending on software, website development and the future Needham, Massachusetts headquarters.
- Total debt was approximately $330 million: $290 million outstanding under the term loan, including $40 million current, and $40 million under Chinese credit facilities. The revolving facility had no borrowings and approximately $199 million of availability after letters of credit.
- The term loan matures in December 2016 and requires quarterly principal installments. The company paid $10 million of principal during the quarter and was in compliance with debt covenants.
- Management stated that available liquidity, expected operating cash flow and credit facilities should fund working capital, capital expenditures, growth initiatives, debt obligations and other commitments for at least the next twelve months.
- Approximately $466 million of cash and marketable securities was held by international subsidiaries and was intended to remain permanently reinvested outside the United States.
Material Changes Versus the Prior Comparable Period
- Revenue grew strongly, but operating income and net income declined because expense growth, particularly selling and marketing, exceeded revenue growth.
- Adjusted EBITDA increased only 4% despite 29% revenue growth, reflecting higher traffic acquisition, television advertising, personnel, technology and acquisition-related costs.
- Click-based advertising remained the principal revenue source but declined to 69% of revenue from 74%.
- Subscription, transaction and other revenue increased 88%, supported by Business Listings, Vacation Rentals and the acquired Attractions and Restaurants businesses.
- Other segment revenue expanded significantly but remained loss-making as management continued investing in earlier-stage businesses.
- Cash increased by $50 million to $505 million, despite lower operating cash flow, primarily because investing cash usage was substantially lower than in the prior year.
- Accumulated other comprehensive loss increased by $28 million, primarily from foreign-currency translation.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide specific quantitative revenue, earnings or margin guidance.
- Management’s strategy emphasizes growing hotel shoppers, improving mobile and Instant Booking functionality, expanding internationally, and investing in Business Listings, Attractions, Restaurants and Vacation Rentals.
- Key risks include increasing competition from search companies and online travel agencies, dependence on click-based advertising, lower mobile monetization, foreign-exchange volatility, seasonal travel demand, and the ability to convert traffic into paid clicks.
- Transaction businesses create data-security and privacy risks, including potential cyberattacks or breaches involving customer information.
- The IRS is examining multiple tax years, including transfer-pricing matters for 2009 and 2010. Management expected a Notice of Proposed Adjustment and believes its position is sustainable, but a proposed adjustment could result in additional federal tax and interest.
- Ordinary-course litigation includes intellectual-property, defamation and other claims. Management stated that no disclosed pending matter was expected to exceed the applicable materiality threshold, while noting that unknown claims could have a material adverse effect.
- On April 2, 2015, CFO Julie M.B. Bradley announced her resignation and agreed to remain through a transition period ending no later than September 30, 2015 or 30 days after her successor begins.
- The company did not repurchase shares during the quarter; $105 million remained available under the authorized repurchase program.
Important Facts for Investors to Verify
- Whether hotel shopper growth and revenue per hotel shopper improve as mobile traffic increases and foreign-exchange effects moderate.
- The sustainability and return on the substantially higher selling and marketing investment, including television and search-engine marketing spending.
- Progress toward profitability in the Other segment and the incremental contribution from Viator, Lafourchette and Vacation Rentals.
- Refinancing or repayment plans for the $290 million term loan maturing in December 2016.
- Potential tax exposure from the IRS transfer-pricing examination and any subsequent proposed adjustment.
- Execution of the CFO transition and its effect on financial reporting and investor communications.
- Mobile monetization, Instant Booking adoption, cybersecurity controls and the effect of competition from Google, Baidu and online travel agencies.