TripAdvisor (NASDAQ:TRIP) released its Q3 2013 results on Wednesday, October 23. The company posted $255 million in revenues, up 20% y-o-y. TripAdvisor suffered the worst quarterly impact of its meta-display transition since the launch of the platform in Q4 2012. Meta-display is a new feature introduced by the company on its website that aggregates hotel pricing and availability information from top advertisers (mainly online travel agencies and hotel chains). This allows users to do all the comparison based shopping on TripAdvisor’s website itself.
Although the meta feature enhances the overall user experience, it faced headwinds due to low conversion rates that reduced growth in click-based advertising revenue by 9%-12% in Q3 2013. As a result click-based advertising revenue ($189 million) grew only 13% y-o-y, the slowest since the company spun-off from leading online travel agency, Expedia (NASDAQ:EXPE), in 2011.  Click-based advertising revenues contribute over 70% to total company revenues.
The display-based advertising division compensated for the disappointment to some extent, growing revenues by 29% y-o-y to about $31 million. The increase is attributable to better sell-through rates globally and a 21% rise in client count. The subscriptions & transactions division continued its fervid momentum, contributing $35 million in revenues with an annual growth rate of 68%. This remarkable growth came on the back of continued business listings, sales productivity, higher inventory and a better user experience in vacation rentals.
Despite the management’s expectation of temporary ramifications due to the meta feature, we believe TripAdvisor’s user base and revenues will grow in the long term, with growth in its mobile platform, improvement in monetization levels, the expansion of its international footprint, and higher acceptance of its meta feature by users and advertisers.
We have updated our model for TripAdvisor based on the Q3 2013 results. Our price estimate of $80 for TripAdvisor marks our valuation at a premium of about 5% to the market price.
Meta-Search Underperforms Expectations, Revenue Parity Likely To Be Delayed
Earlier, users had to click-through to an advertiser’s website in order to view hotel pricing and availability information. The new meta feature collates and displays this information from top advertisers on TripAdvisor’s website. Although this has lowered the number of leads sent by TripAdvisor to its advertisers, the leads are more qualified and have better conversion rates, as now travelers are more probable to click on the advertiser’s link for booking rather than seeking information.
Despite the search enhancement, conversion rate improvement in Q3 was below the management’s expectations. The management attributed this to leakages in the meta system, which results from users who check pricing and availability information on TripAdvisor but do not click on to advertiser websites to make bookings. Instead, they directly visit the advertiser’s website to complete their bookings. Hence, the search could effectively convert into a transaction but TripAdvisor doesn’t get its due credit. 
The management had earlier expected the meta platform to approach revenue neutrality by the end of 2013, but is not as confident now due to the conversion impact. It also lowered its full year 2013 guidance for click-based ad revenue growth to mid to high-teens, from high-teens to low-20s. On the flip side, it expects conversion rates to improve in the future as the meta-display enhances overall user experience by addressing queries on a single page.  In our view, this will help the company to keep the number of revenue generating page views from falling further.
Strong Traffic Growth Owing To Mobile and International Expansion
Average unique monthly visitors to TripAdvisor websites increased to 260 million in Q3 2013, representing year-over-year growth of approximately 60%. Mobile traffic grew over 175% y-o-y and accounted for about 40% of the total traffic, while apps crossed 69 million cumulative downloads. Hotel shopper growth also showed excellent progress on smartphones, with triple-digit growth rates. 
Presently users have to navigate to the advertiser’s website in order to complete their booking. The process is cumbersome for mobile users as they have to return to the TripAdvisor app to check another hotel rate. In addition, while monetization levels of tablets are already approaching that of desktops, smartphone monetization remains low. During the third quarter earnings call, the management announced that it will begin taking direct bookings through the TripAdvisor app from 2014. Direct bookings will reduce the friction associated with mobile bookings and improve smartphone monetization levels by allowing users to complete reservations on the TripAdvisor app itself. 
TripAdvisor has a vast international presence with branded websites in over 30 countries and 20 languages. Its international revenue contribution increased to 53% in Q3 2013, from 50% in the same quarter last year. The Asia-Pacific region mainly contributed to the growth with 45% y-o-y increase in revenues. Asia-Pacific revenues stood at $33 million, representing 13% of total revenues. 
The travel review company is working to increase TripAdvisor domains in localized languages to better serve local travelers and align its offerings with its local OTA partners. It expanded in Latin America in Q3, adding new TripAdvisor domains in localized Spanish language in Venezuela, Peru, Chile and Columbia. TripAdvisor registered 41% y-o-y growth in international hotel shoppers during the quarter. The hotel industry in international markets offer better growth opportunities compared to the U.S. market, where growth is slower. As the company targets further growth outside the U.S., we believe that it can witness higher growth in hotel shoppers.Notes:
- TripAdvisor Reports Third Quarter 2013 Financial Results, TripAdvisor Q3 2013 Earnings Press Release, October 23, 2013 [↩]
- TripAdvisor Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, October 22, 2013 [↩] [↩] [↩] [↩]
- TripAdvisor Reports Third Quarter 2013 Financial Results, TripAdvisor Q3 2013 Earnings Press Release, October 22, 2013 [↩]