TripAdvisor (NASDAQ:TRIP) is slated to release its earnings for the fourth quarter and full-year 2013 Tuesday, February 11. The world’s largest travel review company posted $255 million in revenue in Q3, up by 20% compared to the year-ago period. Click-based advertising accounted for 74% of total revenue and display-based advertising accounted for 12% of total revenue. The remainder came from subscriptions, transactions and other sources. 
Adjusted operating profit fell by 2% year-on-year to $104 million in the third quarter, as TripAdvisor tested and rolled out its new ad campaign in the U.S. However, the bulk of TripAdvisor’s TV marketing spend shifted to Q4 as the company began targeting international markets near the end of Q3.   Based on this, we expect fourth quarter adjusted operating profit to also come lower than the year-ago period.
We will update our current price estimate of $80 for TripAdvisor’s stock after the Q4 2013 results are announced.
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Negative Impact Of Meta-Display Transition On Top Line To Fade Away Soon
Earlier, users had to click through to an advertiser’s website in order to view hotel pricing and availability information. TripAdvisor launched a new meta feature in Q4 2012 that collates and displays this information from top advertisers on its own 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 travelers are now more probable to click on the advertiser’s link for booking rather than just seeking information.
Despite the search enhancement, conversion rate improvement in Q3 was below TripAdvisor’s expectations. The company suffered the worst quarterly impact of its meta-display transition in the quarter since the launch of the platform. Growth in click-based advertising revenue decelerated to 13% year-on-year, from 21% in Q2 and 24% in Q1. 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 fails to get due credit because users bypass the link. 
TripAdvisor’s management had earlier expected the meta platform to approach revenue neutrality by the end of 2013. However, during the Q3 earnings call it lowered the full year guidance for click-based ad revenue growth to mid to high-teens, from high-teens to low 20s, suggesting that revenue parity could be delayed by a few quarters.  Nevertheless, meta-display enhances the overall user experience by addressing queries on a single page. We believe the feature will help the company to expand its user base, which is its key growth driver. It will also drive up the volume of page views per visitor, since users will spend more time on TripAdvisor. Further, the feature will help the company to compete against Priceline’s (NASDAQ:PCLN) Kayak and Expedia’s (NASDAQ:EXPE) Trivago, the meta search market leaders in the U.S. and Europe respectively.
Subscription And Related Revenue To Continue Its Growth Trajectory
TripAdvisor introduced a new transaction-based model in Q1 that 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. TripAdvisor’s subscription, transaction and other revenue increased by 68% year-on-year in Q3 to $35 million.  The company expects to see continued sales productivity in business listings and higher vacation rentals due to the introduction of the offering. 
TripAdvisor also launched a new TripConnect platform in early Q4 that allows small and independent hotels to participate in meta-search. The option to participate in meta-search was previously available only to large hotel chains, and online travel agencies (OTAs) such as Priceline and Expedia. TripConnect offers property owners the chance to bypass OTAs and generate bookings through their own website, thereby saving time on marketing efforts, reducing commissions paid to OTAs and helping them better understand guests’ perception about their property through post-stay reviews. For more insights on the impact of TripConnect, read our article: TripConnect To Give Small & Independent Hotels A Chance To Compete With Larger Players
To participate in TripConnect hotels must subscribe to TripAdvisor Business Listings. A total of 210 Internet booking engines covering 135,000 properties worldwide had signed up for TripConnect before its launch, better than the company’s expectations. Close to 90% of these committed 210 Internet booking engines had opted for the premium offering.  We expect more property owners to try out this new auction platform since TripAdvisor’s vast reach is attractive to hoteliers.Notes:
- TripAdvisor Reports Third Quarter 2013 Financial Results, TripAdvisor Investor Relations, October 23, 2013 [↩] [↩] [↩]
- TripAdvisor Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, October 23, 2013 [↩] [↩] [↩]
- TripAdvisor Inc Management Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, July 24, 2013 [↩]
- Hundreds of booking engines on board for TripAdvisor service in anticipation of launch, TripAdvisor Press Release, August 1, 2013 [↩]