An increase in data center costs to support rising site traffic and higher selling and marketing expenses, traffic acquisition costs and increasing headcount has led to an ongoing decline in TripAdvisor’s (NASDAQ:TRIP) operating margins since 2009. The decline accelerated after TripAdvisor spun-off from leading online travel agency Expedia (NSDQ:EXPE) in December 2011, as it had to incur the general expenses previously borne by Expedia – accounting, legal, tax, corporate development, real estate – and the costs associated with being a publicly traded company.
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We estimate TripAdvisor’s operating margins declined from 56.7% in 2009 to 45.3% in 2012. However, backed by strong revenue growth it witnessed a 30% annual increase in its operating profits in Q1 2013. Though the ongoing investment in its meta transition and recent acquisitions coupled with a fixed-cost structure could lower TripAdvisor’s EBITDA growth in the subsequent quarters, we believe the company can manage to increase margins in the long term.
Growing Revenues To Support Higher Margins
TripAdvisor’s top line has been growing at a robust pace over the last few years. Despite macro weakness in 2012, the company marked a 20% increase in its revenues, primarily on account of rising hotel shoppers and an expanding international user base. We believe that TripAdvisor is well positioned to continue expanding its business in the future.
With more than 200 million monthly unique visitor, TripAdvisor is the one of the leading global travel review website and currently covers 2 million tourism businesses in over 116,000 destinations around the world. Last month, it became the first travel company to cross the 100 million reviews and opinions mark, a greater than 50% y-o-y increase. Despite being the world’s largest travel review website, TripAdvisor only has a 10% market penetration, which leaves tremendous scope for growth. 
Here are some of the factors that we believe will drive TripAdvisor’s future growth –
– Rolling out the meta display feature: During Q4 2012, TripAdvisor rolled out the meta display feature to 100% of its smartphone traffic, and started testing it on desktops and tablets in Q1 2013. With over 50% of its global traffic using the meta feature, TripAdvisor claims to be witnessing higher conversion rates after the introduction of meta display. Approximately 20% of the company’s desktop and tablet users are using the meta display feature currently, and it intends to roll-out the same to all its global users by June this year.
– Expanding International Footprint: Over 60% of TripAdvisor’s traffic originates from outside its core markets of the U.S. and the U.K. With more than a 75% increase in traffic, Asia-Pacific was one of the fastest growing markets for the company in 2012. TripAdvisor offers its content in 21 different languages with more than 60 contributions per minute, which equates to over 30 million contributions in a single year. In 2013, it intends to focus on enhancing its brand image in the emerging markets by incorporating more local language content to drive higher user engagement.
– Increasing Investment In Social & Mobile Platforms To Enhance Brand Awareness: Leveraging growth in social platforms and the rapidly expanding mobile user base remain key priorities for TripAdvisor’s long term growth strategy. TripAdvisor’s Facebook (NASDAQ:FB) app reached the number one spot in terms of monthly active users in Q4 2012, and was the only travel app in the top 20 applications. Presently, 35% of TripAdvisor’s new reviews are derived from its Facebook connected members.
TripAdvisor derives 10-15% of its traffic from mobiles and tablets. Reaching 62 million monthly unique mobile device visitors in Q1 2013, it marked a 300% y-o-y increase and reached close to 36 million downloads for the TripAdvisor application. ((TripAdvisor Management Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, May 7, 2013)) It recently entered into a partnership with Samsung (PINK:SSNLF), making it the only travel application to come pre-installed onto the new Samsung Galaxy S4.
Increasing Expenses: Marketing Spend And Acquisitions
In order to better compete in the travel market, it is imperative for TripAdvisor to continue investing in building its global brand. It has been incurring high expenses to develop its mobile platform and transition its entire business to the meta display feature. Rising headcount and the launch of its first offline campaign also put pressure on margin growth. The company is estimated to shell out around $30 million for its first offline campaign expected to come out later this year. ((TripAdvisor Hires Shops for Its First Offline Campaign, AdWeek, May 20, 2013))
TripAdvisor has made a number of acquisitions in the recent past to expand its business in new markets and products. Its most recent acquisition, Niumba.com is a leading vacation rental website which features over 230,000 properties globally. TripAdvisor intends to support its global demand for vacation rentals with the Niumba’s large inventory of rental properties in Spain.
In the last few months its has acquired key technology and talent from CruiseWise (a former online cruise booking agency), Jetsetter (a leading members-only private sale site for hotel bookings) and Tiny post (a photo sharing service) to enhance its product portfolio and provide a better travel experience to its users.
While increasing investments might limit TripAdvisor’s short term growth, we believe it is an important strategy to spur its long term demand.
Declining Fee From Expedia Will Not Have A Significant Impact On Margins
Expedia is the most important source of click-based revenues for TripAdvisor, which accounts for the majority of the company’s valuation as per our estimate. After the spin-off, Expedia has lowered its per-click commission fee paid to TripAdvisor. TripAdvisor expected the lower click-based pricing from Expedia to negatively impact its 2012 revenue by approximately 5%. While this has put pressure on margins, we believe that the lower price from one customer will not have any material impact on TripAdvisor’s long-term growth.
While Expedia may have lower its referral fee, it intends to continue investing in the TripAdvisor platform as it believes it to be an important source of increasing global traffic for its websites. Though Expedia’s revenue contribution declined from 35.3% in 2010 to 33.1% and 27% in 2011 and 2012, respectively, the revenue in absolute terms has increased from $171 in 2010 to $204 million in 2012.
TripAdvisor’s advertising partners consists of online travel agencies as well as direct hotel, airline and cruise product suppliers. We believe that any potential loss in revenue from Expedia in the future will be compensated by higher advertising revenue contribution from other customers. TripAdvisor claims its second most important customer, after Expedia, accounted for 21% of its revenue in 2012, as compared to 16% and 11% in 2011 and 2010 respectively.
Our price estimate of $50.76 for TripAdvisor is at a discount of around 20% to the current market price.Notes:
- TripAdvisor’s Management Presents at Deutsche Bank’s DbAccess 21st Annual Media and Telecom Conference (Transcript), Seeking Alpha, March 5, 2013 [↩]