Tripadvisor, Inc. 2012 Form 10-K Summary
Business context and reporting period
Tripadvisor operates a global online travel research and advertising platform supported by user-generated reviews, travel content, metasearch, subscriptions, transactions and content licensing. The filing covers the fiscal year ended December 31, 2012, with unaudited quarterly information for the fourth quarter. Tripadvisor completed its spin-off from Expedia on December 20, 2011 and began trading independently on December 21, 2011. The 2011 comparisons are therefore consolidated after the spin-off and combined before it.
- More than 60 million monthly unique visitors, 44 million marketable members and over 75 million reviews and opinions were reported during 2012.
- The company has one reportable segment and approximately 1,575 employees at year-end.
- Revenue is primarily advertising-based, with click-based advertising representing approximately 77% of total revenue in 2012.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $763.0 million | $637.1 million | 20% |
| Click-based advertising | $587.8 million | $500.0 million | 18% |
| Display-based advertising | $94.1 million | $85.7 million | 10% |
| Subscription, transaction and other revenue | $81.0 million | $51.3 million | 58% |
| Operating income | $296.3 million | $272.8 million | 9% |
| Net income attributable to Tripadvisor | $194.1 million | $177.7 million | 9% |
| Diluted EPS | $1.37 | $1.32 | 4% |
| Adjusted EBITDA | $352.5 million | $322.9 million | 9% |
| Net cash provided by operating activities | $239.1 million | $217.9 million | 10% |
Reported operating margin was approximately 38.8%, compared with 42.8% in 2011. Net margin attributable to Tripadvisor was approximately 25.4%, compared with 27.9%. Adjusted EBITDA margin was approximately 46.2%, compared with 50.7%. Margin compression reflected operating expense growth of 28%, including higher traffic acquisition, headcount, technology, international expansion, stock-based compensation and standalone public-company costs.
Fourth-quarter 2012 revenue was $169.4 million, operating income was $47.0 million, net income attributable to Tripadvisor was $33.6 million, and diluted EPS was $0.23. Fourth-quarter 2011 revenue was $137.8 million, operating income was $33.6 million, net income attributable to Tripadvisor was $22.0 million, and diluted EPS was $0.16.
Liquidity, cash flow and debt
- Cash, cash equivalents and short- and long-term marketable securities totaled $585.7 million at December 31, 2012, including $367.5 million of cash and cash equivalents, $119.0 million of short-term securities and $99.2 million of long-term securities.
- Operating cash flow was $239.1 million. Investing cash flow was negative $244.2 million, primarily because of $218.9 million invested in marketable securities and $29.3 million of capital expenditures. Financing cash flow was $189.8 million, including $230.7 million of proceeds from option and warrant exercises.
- Term-loan debt totaled $380.0 million, consisting of $40.0 million current and $340.0 million long-term debt. The company also had $32.1 million of short-term Chinese credit-facility borrowings.
- The $400 million term loan matures in December 2016 and bears variable interest. Scheduled principal payments are $40 million annually in 2013, 2014 and 2015, with $260 million due in 2016.
- The $200 million revolving credit facility had no outstanding borrowings at year-end. Management stated that the company was in compliance with its debt covenants and expected available liquidity and operating cash flow to fund operations, capital expenditures, debt obligations, growth initiatives and potential acquisitions for at least the next 12 months.
Material changes versus the prior comparable period
- Total revenue increased 20%, led by a more than 30% increase in hotel shoppers and an $88 million increase in click-based advertising revenue.
- Expedia-related revenue declined 3% to $203.8 million, representing 26.7% of total revenue versus 33.1% in 2011. Expedia remained the largest customer and paid lower CPC pricing following the spin-off arrangements.
- Subscription, transaction and other revenue increased 58%, driven primarily by Business Listings and Vacation Rentals.
- Selling and marketing expense increased 27%, technology and content increased 51%, and general and administrative expense increased 69%.
- Stock-based compensation increased to $30.1 million from $17.3 million. The company also incurred approximately $7 million of charitable foundation expense in 2012.
- Interest expense increased substantially because of the spin-off-related term loan, contributing to total other expense of $14.3 million versus $0.9 million in 2011.
- Cash and marketable securities increased from $183.5 million to $585.7 million, including proceeds from warrant and option exercises and investment of excess cash in marketable securities.
- The company acquired the remaining noncontrolling interest in a subsidiary for $22.3 million during the fourth quarter, resulting in 100% ownership at year-end.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management expected continued investment in social, mobile, international operations, vacation rentals, Business Listings and hotel metasearch. The company planned to roll out hotel metasearch on desktop and tablet platforms within the next three to six months. Management also expected its effective tax rate to continue declining because of increased non-U.S. earnings and a fourth-quarter restructuring of non-U.S. operations.
- Management expects mobile usage to grow faster than overall usage, but mobile monetization remains less developed and could pressure revenue if users shift away from desktop and tablet platforms.
- The transition to hotel metasearch could reduce click volume while increasing CPC pricing; the expected pricing benefit may not offset lower click volume.
- Revenue concentration is significant: Expedia represented approximately 27% of 2012 revenue, and the two largest advertising customers represented 48% of total revenue. Most advertising agreements can be terminated at will or on short notice.
- Key operating risks include search-engine algorithm changes, disintermediation by Google and other platforms, economic weakness affecting travel and advertising, competition from online travel agencies and metasearch providers, fraudulent or inaccurate user content, privacy and data-security regulation, foreign exchange exposure and international operating risks, particularly in China.
- Variable-rate debt creates interest-rate exposure; management estimated that a 25-basis-point change in the term-loan rate would affect annual interest expense by approximately $1 million.
- The company had $24.0 million of unrecognized tax benefits and was subject to ongoing tax audits. It also had $371.6 million of undistributed foreign earnings intended to be permanently reinvested, for which the potential deferred U.S. tax liability was not practicably estimable.
- The filing reports routine intellectual-property, defamation and other litigation, but management stated that no pending matter was expected to exceed the SEC materiality threshold. The ultimate effect of unknown or future claims could still be material.
- On February 12, 2013, the board authorized a $250 million share-repurchase program. No repurchases occurred during 2012, and the program may be suspended or terminated at any time.
- Goodwill and indefinite-lived intangible assets were tested in October 2012, with no impairment recognized. The company early adopted ASU 2012-02 for the 2012 impairment review without a material financial statement impact.
Important facts for investors to verify
- Whether hotel metasearch improves monetization and CPC pricing without causing a material decline in click volume.
- Revenue concentration, renewal terms and pricing under Expedia and other major advertising relationships.
- Progress in mobile monetization, international expansion and the profitability of the Chinese operations.
- Term-loan repayment capacity, variable-rate exposure, covenant compliance and the $260 million balloon payment due in 2016.
- The cash impact and timing of the $250 million repurchase program relative to debt reduction, acquisitions and international cash restrictions.
- Future trends in operating margins as traffic acquisition, technology, stock compensation and public-company costs continue to grow.
- Potential tax exposure from audits, uncertain tax positions, foreign earnings and the Expedia tax-sharing arrangements.