TripAdvisor, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. The financial statements are unaudited and presented under U.S. GAAP.
Business Context
TripAdvisor operates an online travel research and booking platform spanning hotels, vacation rentals, flights, restaurants, attractions and related services. The company reports two segments: Hotel and Other, with the latter comprising Attractions, Restaurants and Vacation Rentals. Revenue is primarily generated from click-based advertising, display advertising, subscription products and transaction-based offerings.
- TripAdvisor-branded sites reached 375 million average monthly unique visitors during the quarter.
- The platform included approximately 250 million reviews and opinions, 1.7 million accommodations, 3.0 million restaurants and 560,000 attractions.
- Mobile average monthly unique visitors increased 13% year over year to 159 million; cumulative mobile app downloads reached 215 million.
Financial Performance
| Metric | Q2 2015 | Q2 2014 | Change |
|---|---|---|---|
| Revenue | $405 million | $323 million | 25% |
| Operating income | $79 million | $100 million | (21%) |
| Net income | $58 million | $68 million | (15%) |
| Diluted EPS | $0.40 | $0.47 | (15%) |
| Adjusted EBITDA | $123 million | $129 million | (5%) |
| Operating margin | 19.5% | 31.0% | Down 11.5 points |
| Net margin | 14.3% | 21.1% | Down 6.8 points |
| Adjusted EBITDA margin | 30.4% | 39.9% | Down 9.5 points |
| Metric | Six months 2015 | Six months 2014 | Change |
|---|---|---|---|
| Revenue | $768 million | $604 million | 27% |
| Operating income | $169 million | $196 million | (14%) |
| Net income | $121 million | $136 million | (11%) |
| Diluted EPS | $0.83 | $0.93 | (11%) |
| Adjusted EBITDA | $249 million | $251 million | (1%) |
| Operating margin | 22.0% | 32.5% | Down 10.5 points |
| Net margin | 15.8% | 22.5% | Down 6.7 points |
| Adjusted EBITDA margin | 32.4% | 41.6% | Down 9.2 points |
Revenue and Segment Trends
- Q2 click-based advertising revenue increased 13% to $266 million; six-month revenue increased 17% to $515 million. Click-based advertising represented 66% of Q2 revenue and 67% of six-month revenue, down from 73% in each comparable 2014 period.
- Subscription, transaction and other revenue rose 94% in Q2 and 91% year to date, supported by Business Listings, Vacation Rentals and incremental revenue from the 2014 Lafourchette and Viator acquisitions.
- Hotel segment revenue increased 13% in Q2 to $343 million and 17% year to date to $663 million. Hotel Adjusted EBITDA declined 4% in Q2 to $125 million but increased 1% year to date to $257 million.
- Other segment revenue increased 210% in Q2 to $62 million and 200% year to date to $105 million, but Adjusted EBITDA remained negative at $(2) million and $(8) million, respectively.
- Unique hotel shoppers increased 22% in Q2 and 24% year to date, while revenue per hotel shopper decreased 6% and 5%, respectively.
- Foreign exchange, particularly the weaker euro, reduced reported revenue. On a constant-currency basis, management estimated Q2 revenue would have been $439 million and six-month revenue $819 million.
Cash Flow, Liquidity and Debt
| Six-month cash flow | 2015 | 2014 |
|---|---|---|
| Cash provided by operating activities | $299 million | $267 million |
| Cash used in investing activities | $(107) million | $(10) million |
| Cash used in financing activities | $(61) million | $(24) million |
| Capital expenditures | $54 million | $42 million |
- Cash and cash equivalents were $583 million at June 30, 2015, compared with $455 million at December 31, 2014. Cash, cash equivalents and marketable securities totaled $746 million versus $594 million at year-end.
- Total debt was approximately $288 million, consisting of $287 million of long-term debt and $1 million of short-term Chinese borrowings.
- In June 2015, the company replaced its 2011 credit facility with a five-year, $1 billion unsecured revolving credit facility. It borrowed $290 million to repay the prior term loan; available borrowing capacity was $708 million at quarter-end.
- The new facility carried an interest rate of approximately 1.44% at quarter-end, subject to periodic resets, and required compliance with leverage and other covenants. The company reported compliance with all debt covenants.
- Approximately $515 million of cash and marketable securities was held by international subsidiaries and related to earnings intended to be permanently reinvested outside the United States.
Material Changes and Unusual Items
- Operating expenses grew faster than revenue, particularly selling and marketing, which increased 51% in Q2 and 54% year to date. Management cited search-engine marketing, online traffic acquisition, television advertising, personnel and acquisition-related costs.
- Q2 television advertising spending was $19 million; six-month spending was $29 million.
- Amortization of intangible assets increased to $9 million in Q2 and $16 million year to date, primarily due to prior acquisitions.
- The company completed three acquisitions during the first half of 2015—ZeTrip, BestTables and Dimmi—for total consideration of $28 million, including $17 million of goodwill and $12 million of intangible assets.
- The new corporate headquarters was completed in the second quarter and accounted for as a financing obligation. Future minimum lease payments were $143 million, beginning in November 2015, with the initial lease term extending through December 2030.
- Stock-based compensation expense was $18 million in Q2 and $34 million year to date, compared with $15 million and $29 million in the prior-year periods.
- The company adopted new debt issuance cost presentation guidance early, reducing reported other long-term assets and long-term debt by approximately $1 million at December 31, 2014.
Outlook, Risks and Contingencies
The filing does not provide explicit numerical revenue, earnings or margin guidance. Management expects the third quarter to be the company’s seasonal high and the first and/or fourth quarters generally to be seasonal lows.
- Management expects continued investment in mobile products, international expansion, content and community, 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, changing advertiser economics, cybersecurity and privacy incidents, and execution risk from newer transaction-based businesses.
- The company is subject to IRS examinations for multiple tax years, including transfer-pricing matters for 2009 and 2010. The IRS issued proposed adjustments during the quarter; management believes its position is sustainable and intends to defend it. No material assessment had resulted as of June 30, 2015.
- Ordinary-course litigation includes intellectual-property, defamation, tax, regulatory and privacy matters. Management stated that no pending matter was expected to reach the SEC’s materiality threshold, while noting that unknown claims could adversely affect results.
- Management believed available liquidity, expected operating cash flow and credit-facility capacity would fund operations, capital expenditures, growth initiatives, debt obligations and lease commitments for at least the next twelve months.
Investor Verification Checklist
- Verify whether hotel shopper growth can offset continued declines in revenue per shopper and lower mobile and international monetization.
- Track the effect of selling and marketing investment on Hotel Adjusted EBITDA and consolidated margins.
- Assess whether the Other segment can progress toward profitability as Attractions, Restaurants and Vacation Rentals scale.
- Review the new revolving credit facility’s variable-rate exposure, leverage covenant requirements and future refinancing needs.
- Monitor foreign-exchange effects, especially euro exposure, and the proportion of cash held offshore.
- Follow developments in the IRS transfer-pricing examinations and any resulting tax liabilities or interest.
- Evaluate the financial impact of the new headquarters financing obligation and lease payments beginning in November 2015.