Tripadvisor, Inc. quarterly report, Q2 FY2014

Business Context and Reporting Period

TripAdvisor, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company operates one reportable segment: TripAdvisor, an online travel research and transaction platform with websites in the United States and 41 other countries. Revenue is generated primarily from click-based and display advertising, supplemented by Business Listings, Vacation Rentals, booking transactions, restaurant reservations and content licensing.

Nearly 280 million average monthly unique visitors during the quarter.
More than 170 million reviews and opinions across approximately 850,000 hotels and accommodations, 640,000 vacation rentals, 2.3 million restaurants and 450,000 attractions.
International revenue represented 53% of quarterly revenue and 52% of year-to-date revenue.

Financial Results and Key Metrics

Metric	Three Months Ended June 30	Six Months Ended June 30
Revenue	$323 million, up 31%	$604 million, up 27%
Operating income	$100 million, up 6%	$196 million, up 8%
Net income	$68 million, up 1%	$136 million, up 5%
Diluted EPS	$0.47, up 2%	$0.93, up 4%
Adjusted EBITDA	$129 million, up 14%	$251 million, up 13%
Operating cash flow	Not separately disclosed	$267 million versus $133 million

Quarterly operating margin was approximately 31.0%, compared with 38.1% in the prior-year quarter; six-month operating margin was approximately 32.5%, compared with 38.2%.
Quarterly net margin was approximately 21.1%, compared with 27.1%; six-month net margin was approximately 22.5%, compared with 27.0%.
Quarterly Adjusted EBITDA margin was approximately 39.9%, compared with 45.7%; six-month margin was approximately 41.6%, compared with 46.5%.
Click-based advertising revenue was $235 million for the quarter and $442 million year to date, representing 73% of total revenue in both periods.
Display advertising revenue was $37 million for the quarter and $69 million year to date. Subscription, transaction and other revenue was $51 million and $93 million, respectively.
Hotel shoppers increased 17% for the quarter and 14% year to date. Revenue per hotel shopper increased 11% and 8%, respectively.
Cost increases reflected higher selling and marketing, technology and content, depreciation, acquisition-related activity and international expansion. Quarterly selling and marketing expense increased 53% to $127 million, including approximately $10 million of television campaign spending.
Cash and cash equivalents were $587 million at June 30, 2014, compared with $351 million at December 31, 2013. Cash, cash equivalents and marketable securities totaled $721 million.
Capital expenditures were $42 million year to date, and cash paid for acquisitions was $152 million.
Total debt was approximately $353 million, consisting of $320 million under the term loan and $33 million of Chinese credit-facility borrowings. No revolving facility borrowings were outstanding; approximately $199 million of revolving capacity was available.
The company reported compliance with all debt covenants and stated that available liquidity and expected operating cash flow should fund ongoing requirements, commitments and planned initiatives for at least the next twelve months.

Material Changes Versus the Prior Comparable Period

Revenue growth accelerated through higher hotel shopper volume, improved revenue per shopper, international expansion and growth in Business Listings and Vacation Rentals.
International revenue increased 42% in the quarter and 34% year to date, outpacing North American growth.
Operating income and net income grew much more slowly than revenue because total costs and expenses increased 46% in the quarter and 38% year to date.
Operating cash flow doubled year to date, primarily due to working-capital movements, including a $79 million increase in deferred merchant payables.
Investing cash use declined to $10 million from $256 million, reflecting changes in marketable-securities activity that more than offset higher acquisition spending and capital expenditures.
The company completed three acquisitions for total cash consideration of $152 million: Vacation Home Rentals, Tripbod and Lafourchette. These transactions added $105 million of goodwill and $66 million of intangible assets on a preliminary basis.
Cash and liquidity increased despite acquisitions, while debt declined by approximately $15 million from year-end after scheduled term-loan repayments, partly offset by higher Chinese credit-facility borrowings.
The effective tax rate increased to 30.6% from 25.6% for the quarter and to 29.2% from 25.9% year to date, primarily because of changes in jurisdictional earnings and discrete items.

Guidance, Outlook, Commentary, Risks and Unusual Items

The filing does not provide formal financial guidance.
Management expects the third quarter to remain seasonally strongest and the fourth quarter historically weakest, although international growth and differing holiday patterns may alter normal seasonality.
Management continues to invest in mobile, social engagement, international markets, Business Listings, Vacation Rentals and hotel metasearch. Smartphone monetization was stated to be less than 20% of desktop monetization, creating both a risk and a long-term opportunity.
Instant Booking was being integrated into smartphone applications, with plans to extend the feature to desktop and tablet platforms during 2014.
Competition is increasing from search companies, online travel agencies and other travel-information platforms. Key operating risks include traffic acquisition, search-engine changes, advertiser demand and pricing, user conversion, mobile monetization, international expansion, foreign exchange and economic conditions.
The company had approximately $58 million of unrecognized tax benefits and was subject to IRS, state and foreign tax audits. No material assessments had resulted as of June 30, 2014.
Ordinary-course litigation includes intellectual-property infringement, defamation and other claims; management stated that no pending matter was expected to reach the SEC disclosure threshold, while noting that unknown claims could have a material adverse effect.
On July 24, 2014, after the reporting date, TripAdvisor agreed to acquire Viator for approximately $200 million, primarily in cash, subject to customary closing conditions and expected to close in the third quarter of 2014.
The company had $105 million remaining under its $250 million share-repurchase authorization and repurchased no shares during the quarter. It does not expect to pay dividends for the foreseeable future.
The FASB revenue-recognition standard issued in May 2014 had not yet been adopted; management was evaluating its impact and had not selected a transition method.

Important Facts for Investors to Verify

Whether hotel shopper growth and revenue per shopper remain durable as comparisons become more difficult and mobile and emerging-market traffic expands.
The effect of substantially higher selling and marketing spending on operating and Adjusted EBITDA margins.
The cash-flow quality of the large operating-cash-flow increase, particularly the sustainability of deferred merchant payables and other working-capital benefits.
The final purchase-price allocations and operating contribution of the 2014 acquisitions, including Lafourchette and Vacation Home Rentals.
The financing, integration and expected strategic benefits of the subsequent Viator acquisition.
Exposure to international tax, foreign-exchange, regulatory and competitive risks, including the concentration of approximately $434 million of cash and marketable securities in international subsidiaries intended to remain outside the United States.
Future debt repayments, variable-rate exposure and the availability of revolving and Chinese credit facilities.