TripAdvisor Q4 2014 Earnings Preview: Acquisitions And Instant Booking Platform In Focus

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TripAdvisor (NASDAQ:TRIP) is set to release its results for the fourth quarter of fiscal year 2014 on February 11th. The world’s largest travel review company posted revenues of $958 million in the nine months, up by 31% year on year. All the three divisions posted strong top line growth — click-based advertising revenue increased by 25% year on year to $689 million, display-based advertising increased by 21% year on year to $104 million, and subscription & transaction revenue increased by 76% year on year to $165 million. [1]

However, in the third quarter, the performance  fell short of the growth expected by the company. The primary reason for the setback was a seasonal decline in the click per hotel shopper since mid-August 2014. Also, despite the strong top-line growth, TripAdvisor’s adjusted EBITDA increased by around just 14% in the first nine months, due to the acquisition related expenditures, coupled with the expenses directed towards capturing a bigger share of the travel and entertainment.

For full year 2014, the management expects total revenue growth between the high 20% to low 30% range and the click based revenues growth in the mid-20% range. [2]  We believe that due to its investments and initiatives, TripAdvisor will eventually reap benefits in the long run which will translate its strong top line performance into healthy bottom line growth, though it might face temporary set backs in the short run.

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We will update our current price estimate of $94 for TripAdvisor’s stock after the Q4 2014 results announcement.

TripAdvisor Experienced An Eventful 2014 With A Host Of Acquisitions And Upgrades

The online travel market is currently at its dynamic best with continuous influx of new players (Read our article on how Competition Is Shaking Up The Online Travel Space). The competition has  intensified further, since the recession. Many hoteliers have moved to online bookings due to the slump they witnessed in occupancy rates, thus fueling the rise of many online travel agencies. For these reasons, the industry veterans—Priceline (NASDAQ:PCLN), Expedia (NASDAQ:EXPE), Orbitz and Tripadvisor—are tapping the less penetrated but fast growing markets such as mobile bookings and meta-search, and restaurant reservations.

  • Viator: TripAdvisor Tries Gaining Dominance In The Hitherto Fragmented Entertainment Sector

TripAdvisor acquired Viator in September 2014 in order to extend its reach in the entertainment sector, which is TripAdvisor’s third largest source of demand after hotels and restaurants. Viator is an online service provider of over 20,000 tours and attractions. A 2013 Special Report by Skift found that the tours and activities market is highly fragmented, with high barriers for entry, and operators requiring big brands to achieve scale. [3] Hence, TripAdvisor’s acquisition might give Viator the scale it requires to achieve further profitability and expansion in the tours and activities sector.

  • Just For You Feature: TripAdvisor Aims To Personalize And Enhance User Experience

In October 2014, TripAdvisor introduced a new feature called “Just for You”, providing personalized hotel recommendations to its users based on their customized preferences and prior travel search activity on the website. [4] With this feature launch, TripAdvisor aims to increase the value-add for users and advertising partners. This in turn will boost its own business by accelerating traffic growth, which will help in booking conversions as well.

  • Acquisitions In Restaurant Reservation: TripAdvisor Diversifies Its Portfolio To Gain Market Leadership Through Regional Leaders

On January 2015, TripAdvisor announced the decision to acquire leading Dutch restaurant review and booking websites, iens and SeatMe. With the completion of the deal, TripAdvisor would be a leader in the Dutch restaurant booking and review space. Sixteen year old iens.nl currently contains reviews for 20,000 restaurants and receives approximately 20 million visitors per year. The company iens expects sales to the tune of €6 million in 2015. [5] SeatMe, which merged with iens in 2012, completes the booking process for iens.

Earlier in May 2014, TripAdvisor acquired LaFourchette (meaning “The Fork”) for $140 million. LaFourchette is one of the leading Internet and mobile restaurant reservation systems in France and Spain with over 12,000 participating restaurants. [6]

We list the key aspects that TripAdvisor might have considered before investing in multiple ventures in the online restaurant reservation and booking space:

  • TripAdvisor receives over 200 million page views per month from its restaurant traffic. With these acquisitions, it will be able to provide a better experience to these users by offering a booking service and taking them further down the booking funnel.
  • The scope of growth in the online restaurant reservation category is much bigger internationally than that in TripAdvisor’s domestic market—the U.S. While over 20% of restaurant bookings in the U.S. occur online, the percentage stands at low single-digits in nearly every international market. [7] However, international diners are increasingly using the internet to make restaurant reservations due to the convenience and discounts offered online.
  • iens and LaFourchette are regional market leaders but they lack significant global presence. TripAdvisor’s strong global reach, coupled with an average of 315 million monthly unique visitors, can convert a huge chunk of TripAdvisor’s traffic into diners. Along with the global expansion of these restaurant reservation and booking brands, this will help TripAdvsior in gaining dominance in the table reservation industry.

TripAdvisor’s Instant Booking Feature Can Be Its Greatest Challenge To Existing Leaders

TripAdvisor launched its Instant Booking feature  in Q1 2014, in order to reduce the friction associated with mobile bookings. Instant Booking provides an improvement in both the user’s and the partner’s experience. Instant Booking allows users to book hotels on the TripAdvisor platform itself with the “Book with TripAdvisor” option, rather than visiting the hotel or OTA website to complete the booking process, after searching for hotels through TripAdvisor (which is TripAdvisor’s current model). [8]

TripAdvisor’s standard metasearch model follows a cost-per-click structure where partner hotels bid for each click made by users on the partners’ links. Instant Booking, on the other hand, requires partners to pay a commission for each completed transaction. Hence, willing partners bid via an auction, for the commission percentage they are ready to pay for completed transactions. The commission based model is similar to most of the OTAs’ pricing process of a fee per transaction, charged after the completion of stay [9] .

The new model, which will be gradually rolled out worldwide, is expected to aid TripAdvisor in two ways:

  • Smaller hotels/chains couldn’t compete with established OTAs to post advertisements on TripAdvisor, under the cost per click (CPC) model. These entities could be willing to participate in the commission based model, as payment is based on actual hotel stays rather than for a mere click on the hotel’s website. Also, TripAdvisor’s auction model is more affordable for these smaller chains and independent properties. Hence, we expect TripAdvisor to gain more partners from different segments due to this pricing advantage.
  • This new model will expand TripAdvisor’s functionalities beyond a travel review website, as TripAdvisor starts offering services like other established OTAs.

In Q3 2014, during its earnings call, the management observed that users appear to prefer the Instant Booking feature, and are using it for bookings more than the metasearch option. The rate of user conversion to booking seems to have accelerated. Instant booking is currently available across the U.S., with a broader rollout to other important markets expected later this year.

In the long run, Instant Booking might help TripAdvisor to provide direct competition to established names such as Expedia and Priceline.

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Notes:
  1. TripAdvisor Form 10-Q, Filed November 4, 2014 []
  2. TripAdvisor’s (TRIP) CEO Stephen Kaufer on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, November, 2014 []
  3.  Special Report: Why the tours and activities market is more hype than the next big thing, Skift, February 2013 []
  4. TripAdvisor launches new personalised hotel recommendations, Travel Daily News, October, 2014 []
  5. Tripadvisor acquires leading Dutch restaurant rating site, Reuters, January 2014 []
  6. Restaurant Reservation Service LaFourchette Gobbled Up By TripAdvisor For ~$140M, TechCrunch, May 07, 2014 []
  7. TripAdvisor’s (TRIP) CEO Stephen Kaufer on Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 06, 2014 []
  8. TripAdvisor raising the game for Business Listing with rates, availability, and booking service, tnooz, July 2013 []
  9.  What TripAdvisor’s instant booking means for hotels, tnooz, November 2014 []