The world’s largest travel review website, TripAdvisor (NASDAQ:TRIP), continued to grow strongly in the second quarter of fiscal year 2013 with a 25% y-o-y increase in revenue, driven primarily by traffic growth. Click-based advertising revenue grew 21% y-o-y due to robust growth in hotel shoppers in both core and emerging markets while display-based advertising revenue growth accelerated to 18% owing to a rise in traffic and better sell-through rates.
The company’s EBITDA slowed with 16% y-o-y growth compared to 30% observed last quarter on account of hiring and acquisition related costs as well as headwinds related to the meta display roll-out. Management expects further EBITDA growth to slow in the second half of the year due to the negative impact from the transition to meta and costs related to the launch of its new off-line ad campaign. 
Despite management’s expectation of temporary ramifications resulting from the full-fledged roll-out of the meta display, we believe TripAdvisor’s user base and revenues will grow in the long term with growth in its mobile platform, the expansion of its international footprint, and higher acceptance of its meta feature by users and advertisers.
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Meta Display To Limit Short Term Growth But Approach Revenue Neutrality By Year End
TripAdvisor rolled out its new meta display feature globally across its smartphone traffic in Q4 2012. By Q1 2013, about 20% of the company’s desktop and tablet users were using the meta display feature. The transition to 100% meta display across all devices globally was completed in the latter part of Q2 2013.
Earlier, TripAdvisor’s partner pages appeared in a pop-up window when a user entered a travel query. However, the company has now integrated all the search query results on the main page known as meta-search. When users perform a search on TripAdvisor, they get all results on the page along with a map that pinpoints the location in the user’s search results. This enhancement allows users to see travel content, real time hotel pricing and availability from booking partners, all on a single page.
Revenue from advertisements on meta search are CPC (cost per click) based. Since comparison-shopping now takes place on TripAdvisor’s website, fewer leads are sent to advertisers. However, the leads are more qualified, resulting in higher conversion rates of hotel shoppers to revenue-generating clicks.  Hence, TripAdvisor charges CPC rates about three times higher than historical rates, although the higher rates have not yet been able to offset revenue headwinds due to fewer leads sent than before. This negatively impacted growth by approximately 3%–5% in Q1 2013. The impact was even more magnified in Q2 2013 at 6%–9% due to the 100% roll-out of the meta feature in the latter part of the quarter.
Management expects continued headwinds in Q3 2013 as it will be the first quarter with 100% meta throughout the period, and the effects will also fall to the bottom-line as hiring and investment plans remain unchanged. However, it also expects the impact to steadily subside thereafter and see revenue neutrality by the end of the year as the meta feature brings more customers on board, conversion rates improve and advertisers become more familiar with the meta search operating model. 
Although the meta transition is expected to negatively impact TripAdvisor in the short term, we believe the feature will help the company expand its user base in the long run as it enhances the overall user experience by addressing queries on a single page. This in turn will lead to revenue enhancement as the company’s vast user base is its key growth driver.
Strong Traffic Growth Owing To Mobile And International Expansion
The average unique monthly visitors on TripAdvisor’s websites stood at 220 million in Q2 2013, an increase of about 57% y-o-y. Mobile traffic grew over 200% y-o-y and accounted for about 35% of the total traffic while cumulative app downloads for the quarter breached 50 million, an annual increase of more than 125%.
TripAdvisor recently entered into a partnership with Samsung (PINK:SSNLF) making it the only travel application to come pre-installed on the new Samsung Galaxy S4. This benefited the company as app utilization increased by 10% during Q2 2013. With the acquisition of GateGuru, TinyPost and Jetsetter, TripAdvisor added several new travel, search and review apps, and websites to its portfolio in Q2 2013.
Hotel shopper growth showed good progress on smartphones with triple-digit growth rates. However, while monetization levels of tablets are already approaching that of desktops, smartphone monetization remains low at around 20%. We believe the current boom in mobile usage will fuel growth in the user base for TripAdvisor, and as the company strives to improve monetization rates on smartphones, revenue will grow.
Also, the company has a vast international presence with TripAdvisor branded websites in 30 countries and 21 languages. About 50% of its revenues come from international markets. TripAdvisor is presently working on new TripAdvisor domains in localized languages to better serve local travelers and align its offerings with its local OTA partners in the region. As it targets growth outside the U.S., we feel that it can witness higher growth in hotel shoppers as the hotel industry in international markets offers better growth opportunities compared to the U.S. market, where growth is slower.
New Transaction-Based Offering Lifts Outlook For Subscription And Other Related Revenue Growth
Subscription, transaction and other revenue increased by 68% y-o-y in Q2 2013 mainly due to improved business listing sales productivity and higher vacation rentals. Subscription and other revenues contributed 13% to the company’s total revenue compared to 10% in Q2 2012. The new transaction based-model introduced in Q1 2013 is different from the old subscription model under which properties paid a subscription fee to TripAdvisor for business listing. Now, properties are free to list but they pay on a per transaction basis, which has resulted in a greater number of businesses listing themselves. Additionally, this allows TripAdvisor to list those properties at the top which have higher conversion rates, thus providing the best recommendation to the user. The company expects to see continued sales productivity in business listings and higher vacation renting due to the introduction of the offering. For the full year 2013, it now expects subscription and other related revenue growth at close to 60%. 
We are in the process of updating our price estimate of $54 for TripAdvisor.Notes: