TripAdvisor Surprises Markets With Top-line Growth Though Margin Pressure A Concern

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Tripadvisor

TripAdvisor (NASDAQ:TRIP) surprised the markets with revenues growing by 23% to $184 million this quarter. The stock was trading at a premium of 17% during extended trading hours on May 1, reaching an all-time high of $42.75. The revenue growth was driven by a robust 30% growth in hotel traffic and better cost per click (CPC) pricing. Despite strong revenue growth, net GAAP income rose by just 2% to $48.1 million due to increased expenditure in selling, technology and administration segments. In order to increase unique visitors and further enhance its top-line, the company is extending its reach through alternate platforms such as Facebook and launching mobile applications, dashboards, etc. Considering the growth opportunities in international revenues, the company is also seeking international expansion plans. TripAdvisor was spun off from online travel agency Expedia (NSDQ:EXPE) in a public offering in December 2011. The firm’s operating margins have suffered post the spin-off, and this trend is expected to continue, going forward.

See our complete analysis for TripAdvisor’s stock

Spin-off Squeezes Operating Margins

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TripAdvisor’s operating expenses increased by 45% to $110 million and, as a result, operating margins fell y-o-y from 49% to 40% this quarter. The operating margins suffered mainly due to increased expenditures arising from the spinoff. These expenditures include costs related to services previously obtained from Expedia, such as accounting, legal, tax, corporate development, real estate, and additional costs associated with being a publicly traded company. General and administrative expenses doubled y-o-y this quarter. The potential gains arising from robust revenue growth vanished due to the growing expenditure bubble.

Further, the company has been investing immensely in technology platforms and launching the latest mobile apps. This quarter saw the launches of a new hotel booking site Tingo, a SeatGuru mobile and tablet app, and a business listing dashboard. All of these initiatives have raised technology and content expenses by 36%. As the company plans for launch of new platforms, this trend is expected to continue and the increased costs will negatively impact the bottom-line.

Social Media and Mobile Platforms Driving Visitor Count

TripAdvisor’s business model is driven by the number of unique visitors on its platforms. Considering that 80% of the total revenues come from click-based advertising, the company is looking for more avenues to increase penetration and make its platforms more accessible. It is leveraging its integration with Facebook, with its personalized trip planning count reaching 120 million.

With increasing penetration of Internet on mobile devices, the page views on mobile and tablet devices were up 2.5 to 3 times during this quarter. Within the mobile segment, tablets present a greater opportunity with their relatively bigger screens and better interface. This is evident from the fact that tablet sessions are able to monetize at 50-60% of desktop while smartphones monetize at 10-20% of desktop.

TripAdvisor is confident about the growth opportunities in mobile space and so is investing heavily in its mobile platforms such as SeatGuru mobile and tablet app. At the same time, it is actively tapping property managers by offering them interactive business listings dashboards. Since TripAdvisor’s revenue estimates are based on the number of page views per visitor, these promising statistics would boost our top-line forecasts for the company.

Further, the company is also pursuing opportunities in boosting hotel traffic, which remains the key driver of its click-based stream. The launch of a hotel booking site, Tingo, is another step toward enhancing its hotel booking revenues. Tingo facilitates users to book hotel rooms and allows them to claim a refund for the price difference in case the room tariff falls before their stay.

We have a Trefis price estimate of $24.80 for TripAdvisor, which is about 30% below the market price. We are in the process of revisiting our price estimate based on this quarter’s results.

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