TripAdvisor (NASDAQ:TRIP), a leading online platform for travel-related reviews, spun off from online travel agency Expedia in December 2011. Since the spin-off, Expedia has registered significant gains in its stock price from $27 in December 2011 to the current level of around $46. We feel the spin-off was a good move as it gives TripAdvisor an opportunity to unlock its value fully by operating as a standalone business given the different nature of the two businesses. (Read Q4 2012 Earnings Article: TripAdvisor’s Focus On Hotels, Social Media & Mobile Are Paying Off)
With a database of over 75 million user reviews and opinions, TripAdvisor is one of the most popular travel review websites. Increasing access to the Internet worldwide, expanding online advertising budget and growing social media popularity has contributed to TripAdvisor’s robust top-line growth over the years.
However, TripAdvisor’s general expenses post spin-off has risen considerably. These expenses include back office and administrative costs previously borne by Expedia such as accounting, legal, tax, corporate development, real estate and costs associated with being a publicly traded company. Additionally, Expedia has reduced its per-click commission fee paid to TripAdvisor post the spin-off which has placed additional pressure on TripAdvisor’s operating margins.
TripAdvisor expected the lower click-based pricing from Expedia to negatively impact its 2012 revenue by approximately 5%. We believe the lower price from one customer will not have any material impact on the company’s long-term growth. While Expedia may have reduced its referral fee, it intends to continue investing in the TripAdvisor platform as it believes it to be an important source of increasing global traffic for its websites.
Expedia Remains the Most Important Customer for TripAdvisor
TripAdvisor derives the majority of its revenue from advertising – click-based advertising and display-based advertising. Click-based advertising is its largest source of revenue and is generally priced on a cost-per-click (CPC) basis, with payments from advertisers based on the number of users who click on a particular link.
Expedia remains the most important source of click-based revenues for TripAdvisor. While Expedia’s revenue contribution declined from 35.3% in 2010 to 33.1% and 27% in 2011 and 2012, respectively, the revenue in absolute terms has increased from $171 in 2010 to $204 million in 2012. TripAdvisor claims that it continues to be highly dependent on its advertising and media relationship with Expedia.
In its Q4 2012 earnings call, Expedia mentioned that TripAdvisor remains an important source for its increasing global traffic and the company intends to continue its spending pattern on the TripAdvisor platform in the future as well.
What Is TripAdvisor’s Commercial Arrangement With Expedia?
Prior to the spin-off, TripAdvisor’s operating expenses included related party shared service fee which included allocations from Expedia for accounting, legal, tax, corporate development, financial reporting, treasury and real estate functions. TripAdvisor earned related-party revenue from Expedia which consisted of click-based advertising and other advertising services provided to Expedia and its subsidiaries at a contract value.
After the spin-off, TripAdvisor entered into a new arrangement with one-year tenure with Expedia-owned brands including Expedia.com and Hotels.com. The primary change was that post the spin-off, Expedia would pay 10-15% lower CPC. The change was implemented Q4 2011 onward and the decline in prices trended towards the upper end of the discount range (i.e. 15%). TripAdvisor at the time expected the decrease in Expedia’s CPC prices to negatively impact 2012 revenues by approximately 5%.
Increasing Advertising Revenue From Other Customers
TripAdvisor’s advertising partners consists of online travel agencies as well as direct hotel, airline and cruise product suppliers. Though it does not report the revenue contribution from other customers, TripAdvisor claims its second most important customer, after Expedia, accounted for 21% of its revenue in 2012, as compared to 16% and 11% in 2011 and 2010 respectively.
We believe that any potential loss in revenue from Expedia in the future will be compensated by higher advertising revenue contribution from other customers. The fact that TripAdvisor no longer operates as a unit of Expedia anymore might enable it to generate higher revenue from existing customers and attract new customers in the future.
Our price estimate of $38.34 for TripAdvisor is at a slight discount to the current market price.