Meta-Search and Instant Booking Platforms Will Lift TripAdvisor’s Results

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TripAdvisor (NASDAQ:TRIP) is set to release its results for the second quarter of fiscal year 2014 Wednesday, July 23. The world’s largest travel review company posted revenues of $281 million in the first quarter, up by 22% year on year. All the three divisions posted strong top line growth — click-based advertising revenue increased by 16% year on year to $207 million, display-based advertising increased by 28% year on year to $32 million, and subscription & transaction revenue increased by 62% year on year to $42 million. [1]

Citing the better than anticipated results for the first quarter, TripAdvisor raised its guidance for top line growth for the year from mid-20s to high 20s to low 30s. However, the forecast does not incorporate any meaningful upside from future increases in pricing and conversion rates on the company’s recently launched meta-search platform. It also does not include the effect that its new ad campaigns will have on the traffic. This means that revenues could increase beyond the management’s expectations. TripAdvisor began investing into new TV campaigns recently, and therefore, it expects to incur the bulk of its selling and marketing expenses for the year in Q2 and Q3. This could negatively weigh on the company’s profitability to some extent. [2]

We will update our current price estimate of $89 for TripAdvisor’s stock after the Q2 2014 results announcement.

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Pricing and Conversion Improvement on Meta-Search To Continue

Earlier, TripAdvisor’s users had to click through to an advertiser’s website in order to view hotel pricing and availability information. The meta platform was launched last year to allows users to do comparison-based shopping on TripAdvisor’s website itself through information collated and displayed from top advertisers.

Although this lowered the number of leads sent by TripAdvisor to its advertisers, the leads were more qualified and had better conversion rates, as travelers were more likely to click on the advertiser’s link for booking rather than for simply seeking information. The better quality leads allowed TripAdvisor to increase its advertising rates. Despite this, the meta platform was unable to achieve revenue neutrality until Q3 2013, as fewer leads were being sent to advertisers than before. Advertisers were wary of the transition to meta-display, and thus, they were conservative when bidding on the new platform.

The platform approached revenue neutrality in December last year through a combination of higher ad pricing and better conversion rates. Pricing improved through Q1 2014 as competition among advertisers to gain visibility in the meta platform lifted bids, while conversion rates improved as more users returned to make purchases. This helped TripAdvisor to register strong growth in click-based advertising, its most important business. Revenue per hotel shopper growth accelerated from -19% and -9% in Q3 and Q4 2013 respectively, to +1% in Q1 2014. [2] We expect further acceleration as the meta platform grows in scale.

Launch of Direct Bookings to Improve Mobile Monetization

Using TripAdvisor’s app was cumbersome for users until October last year, as they had to click on advertisers’ links to see details and complete the booking process. The company launched native apps for Android and iOS devices to reduce this friction. The re-launched apps allowed in-app navigation by keeping the booking experience restricted within TripAdvisor’s app instead of launching new advertiser windows in a mobile browser.

Although this enhanced the interface, users continued to struggle when they wanted to move back and forth between advertisers’ and TripAdvisor’s content. The problem was more prominent in smartphones than other devices due to the smaller size of the screen. Therefore, the company began taking direct bookings on its Android and iOS apps and its mobile site, last quarter. This new feature is called Instant Booking. It enhances the user’s experience by completing the booking process on TripAdvisor itself. It handles all aspects of the booking process from selecting a room to inputting personal and credit details, thus offering a frictionless booking experience.

Instant booking is currently available across the U.S., with a broader rollout to other important markets expected later this year. The company is designing similar versions for desktops and tablets. We think that Instant Booking will help the company to drastically improve smartphone monetization levels. TripAdvisor’s smartphone monetization is much lower than desktop monetization, even though mobile traffic accounts for nearly half of the total traffic and is growing much faster than desktop traffic.

Subscription Business to Maintain Its Growth Trajectory

TripAdvisor has historically seen robust revenue growth at its subscription, transaction and other (STO) division. The company earned $29 million as STO revenues in 2010, and the figure grew at a compounded annual rate of about 65% to $130 million in 2013. This compares with contemporaneous growth of 25% in the company’s top line. Improved sales productivity and pricing for the company’s Business Listings product and increased brand awareness, inventory and transactions for the company’s Vacation Rentals product were the key drivers behind the out-performance of the division.

We expect the division to continue growing strongly on the back of sales efficiency, a rapidly expanding user base, the launch of TripConnect for small and independent hotels, the introduction of a new commission model for vacation rentals, and TripAdvisor’s entry into online restaurant reservations. Subscriptions and transactions account for 16% of our valuation for TripAdvisor’s stock.

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Notes:
  1. TripAdvisor Reports First Quarter 2014 Financial Results, TripAdvisor Investor Relations Website, May 06, 2014 []
  2. TripAdvisor’s (TRIP) CEO Stephen Kaufer on Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 06, 2014 [] []