Tripadvisor, Inc. — Q3 2013 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. Tripadvisor operates an online travel research and advertising platform, with revenue primarily from click-based and display advertising, plus subscription, transaction, and content-licensing offerings. The company reported one operating segment.
- More than 260 million average monthly unique visitors in Q3 2013, over 125 million reviews and opinions, and approximately 57 million marketable members.
- International revenue represented 53% of total revenue in Q3 and 51% for the nine-month period.
- Q3 is historically the company’s strongest seasonal quarter; Q4 is typically the weakest.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Change |
|---|
| Total revenue | $255.1 million | $212.7 million | +20% |
| Operating income | $83.7 million | $92.2 million | -9% |
| Net income attributable to Tripadvisor | $55.9 million | $59.4 million | -6% |
| Adjusted EBITDA | $104.4 million | $107.1 million | -2% |
| Diluted EPS | $0.38 | $0.41 | -7% |
| Margin | Q3 2013 | Q3 2012 |
|---|
| Operating margin | 32.8% | 43.4% |
| Net margin | 21.9% | 27.9% |
| Adjusted EBITDA margin | 40.9% | 50.3% |
| Nine-month metric | 2013 | 2012 | Change |
|---|
| Total revenue | $732.0 million | $593.6 million | +23% |
| Operating income | $266.1 million | $249.3 million | +7% |
| Net income attributable to Tripadvisor | $185.2 million | $160.5 million | +15% |
| Adjusted EBITDA | $326.6 million | $288.2 million | +13% |
| Diluted EPS | $1.27 | $1.14 | +11% |
| Net cash from operating activities | $278.3 million | $167.9 million | +65% |
- Q3 revenue consisted of approximately $189 million of click-based advertising, $31 million of display advertising, and $35 million of subscription, transaction, and other revenue.
- For the nine months, click-based advertising contributed $552 million, display advertising $86 million, and subscription, transaction, and other revenue $94 million.
- Cash, cash equivalents, and marketable securities totaled approximately $596 million at September 30, 2013, excluding $40.4 million of securities sold but not yet settled. Including that receivable, total liquidity was approximately $636 million.
- Debt included $350 million of term-loan borrowings and $26.2 million of Chinese short-term borrowings. No borrowings were outstanding under the $200 million revolving credit facility.
- Capital expenditures were $39.3 million and acquisitions used $31.5 million during the first nine months. The company repurchased $137.6 million of common stock in cash during the period and had $107.7 million remaining under its authorization.
Material changes versus the prior comparable period
- Revenue growth was led by a 13% Q3 increase in click-based advertising, a 29% increase in display advertising, and a 68% increase in subscription, transaction, and other revenue.
- Hotel shoppers increased 37% in Q3 and 40% for the nine months, but revenue per hotel shopper declined 19% and 15%, respectively.
- Management attributed lower monetization to the transition to hotel metasearch, increasing smartphone traffic, and expansion in lower-monetizing emerging markets. The company expected this trend to continue to pressure revenue growth over the balance of 2013.
- Operating expenses grew faster than revenue in Q3: selling and marketing increased 45%, technology and content 46%, and general and administrative 22%. As a result, operating income, net income, and Adjusted EBITDA declined despite strong revenue growth.
- International revenue growth was particularly strong in APAC, which increased 45% in Q3 and 53% for the nine months.
- The company completed five acquisitions, including Jetsetter, Niumba, CruiseWise, GateGuru, and TinyPost, for $31.5 million of cash consideration net of cash acquired. Goodwill increased to $500.7 million from $471.7 million at year-end 2012.
- Stock-based compensation increased to $35.5 million for the nine months from $19.9 million in the prior-year period.
Guidance, outlook, commentary, risks, and unusual items
- No formal quantitative revenue or earnings guidance is provided in the filing. Management expects continued investment in mobile, social, global expansion, metasearch, technology, subscription products, and acquisitions.
- Mobile usage grew rapidly, but smartphone monetization was less than 20% of desktop hotel-shopper monetization during the nine months ended September 30, 2013. Mobile growth therefore represents both a strategic opportunity and a near-term monetization risk.
- Management identified increasing competition from search engines and online travel agencies, uncertain global economic conditions, lower European travel spending, advertiser pricing and conversion changes, and dependence on click-based advertising as important risks.
- China operations continued to operate at a loss, while the company maintained Chinese credit facilities totaling $26.2 million.
- Expedia-related revenue was $56.2 million in Q3 and $171.0 million for the nine months, representing 22.0% and 23.4% of total revenue, respectively. This concentration and related-party relationship warrant monitoring.
- The company entered into a 15-year, seven-month headquarters lease with estimated aggregate minimum payments of $143.5 million, beginning in November 2015. Total minimum payments under all operating leases were approximately $197.7 million.
- Management stated that it was in compliance with debt covenants and expected available liquidity, operating cash flow, and credit facilities to fund operations, investments, debt obligations, commitments, repurchases, and potential acquisitions for at least the next twelve months.
- Pending litigation was described as ordinary-course litigation, with no matter expected by management to exceed the SEC materiality threshold; the filing notes that undisclosed claims could still have a material adverse effect.
- The Q3 effective tax rate was 33.2%, including a $1.8 million release of an uncertain-tax-benefit accrual following receipt of a private letter ruling. The nine-month effective tax rate was 28.2%.
Important facts for investors to verify
- Whether hotel metasearch improves long-term conversion and CPC pricing enough to offset lower lead volume and near-term revenue-per-shopper declines.
- The sustainability of revenue growth as mobile and international traffic expand at lower monetization rates.
- Expense discipline, particularly selling and marketing, technology investment, headcount growth, and stock-based compensation.
- Expedia-related revenue concentration, contract terms, and the continuing influence of Liberty Interactive, which held approximately 56.8% of voting power through Class B shares.
- Debt maturities, variable-rate exposure, Chinese facility renewals, and compliance with leverage and interest-coverage covenants.
- Cash deployment through share repurchases, acquisitions, capital expenditures, and the new headquarters lease.
- Tax audit outcomes, foreign earnings intended to remain reinvested overseas, and potential related U.S. tax consequences.
- Seasonal effects, competitive developments, economic conditions, foreign-exchange movements, and the company’s ability to maintain traffic and advertiser demand.
