July 24th, 2018
TripAdvisor’s long-run strategic positioning has consistently come under scrutiny amid challenged top and bottom line growth. In 2014, the company executed on new initiatives as part of its pivot from a travel review site into a full-service e-commerce platform. This included the launch of Instant Booking, the Viator, and the La Fourchette (The Fork) acquisitions. The company set off into uncharted territory in part to redirect declining ad profitability, as less lucrative mobile formats ate up share of visitor traffic. The road to sustainable profitable growth has since proved long, with seven consecutive years of declining profitability.
We now believe that the company has turned a corner. TripAdvisor stock hit bottom late 2017, and has since rebounded in line with encouraging fourth and first quarter financial results. Strong growth in non-hotel revenues fort recently re-branded Experiences product and its restaurant reservation fee revenues, coupled with stablized EBITDA margins on the hotel side, point to better financial footing in a rapidly evolving online travel market.
On the supply side, the company has aggressively added bookable inventory for its non-hotel segment. The top line could easily double within two years. The push for Instant Booking has fallen away as a core strategic priority - with leadership now pointing to improved hotel auction stability and click revenue over previous quarters.
Continued gains in unique monthly visitors, user reviews, and hotel shoppers are also encouraging. The recent acquisition of Bokun in April will help expedite the onboarding of activities providers, and further affirmed the company's leadership positioning in a nascent online bookable experiences market.
Overall, we have witnessed a reset in how Trip is covered by media, and clearly in investor appetites for the asset. The following events may have contributed to its recent gains on Wall Street: 1) improved strategic and financial performance 2) undervaluation after falling off of its 2014 3) developments in the industry including the decline of the Expedia owned Trivago asset post IPO which had served as a benchmark against Trip’s hotel business (dubbed here as the Trivago effect) 4) the rising exuberance over the online bookable tours and activities sector and 5) the continued growth in global travel demand.
While the days of easy organic traffic acquisition and click-through profits on user-generated content are over, we recognize leadership for pushing forward with its long-run transformation strategy. We expect second quarter earnings to offer confirmation that TripAdvisor is on a path toward profitable growth. We expect to see flat to improved EBITDA margins on flat to declining hotel revenue, with slightly positive margins and significant top-line growth for the non-hotel segment; with continued currency tailwinds in upwards of 3% over Q2 of last year.
TripAdvisor had been transitioning from an ad-driven review site into a full-service e-commerce platform since 2014, during which time the company had executed on a series of risky strategic pivots. The launch of Instant Booking, the Viator and La Fourchette acquisitions were key antecedents to TripAdvisor's current position.
Along with improved metrics, this latest investor update i.e. its 2018 first quarter earnings struck a different tone compared to previous quarters. Rather than faith-based reassurances and updates on strategic pivots, the underlying message was that of a company in execution mode, and one that now has a clear business model with achievable KPIs.
The good old days.
When Trip spun away from Expedia in 2011 the company was a money printing machine, capitalizing on its preeminent position and user-generated reviews to drive cheap organic traffic, mostly through Google search results - if not direct. The business model was intuitive. Users would come for the content and then click off via display ads and links to hotels, attractions, restaurants, and other sites once they found what they were looking for.
From TripAdvisor's 2011 annual report:
"To ease planning, we enable consumers to research pricing and availability from third-party travel booking sites once they have identified the right hotel or destination for their travel needs. To facilitate better travel experiences for consumers and to create a feedback loop between the hospitality industry and individual travelers, we allow hospitality management representatives to respond to reviews of their properties on our website. We believe that the robust feedback loop created on TripAdvisor-branded websites and the volume of reviews generated on TripAdvisor-branded websites provides a sustainable advantage over
This was a lucrative scenario with EBITDA margins exceeding 50%. What changed? As with other digital ad-driven businesses, the transition toward smaller mobile interfaces cut deep into advertising revenues. The smaller format limited available real estate on the site along with declining CPC rates.
The impact had become visible as expressed in financials and risk statements. From 2013 annual report: “Growth in the use of TripAdvisor through smartphones as a substitute for use on personal computers and tablets may negatively affect our revenue and financial results.”
TripAdvisor's response to this trend was multi-fold and included monetizing further down funnel on its hotel metasearch (CPC model) and via hotel Instant Book which was an OTA-lite CPA model alternative to its auction platform. The initiative gained initial traction with a big roll-out partnership with Booking.com and various large hotel groups. Expedia joined in 2016 during which time Trip's non-hotel segment had already begun capturing solid top line share. Part of the plan was to unify its vacation rentals business under the TripAdvisor brand from the FlipKey platform.
The initiative was met with opposition from the vacation rental management community and Trip eventually lost steam in the category. Hotel search and book would become the lead-in strategic focus through 2017. Rentals still account for a significant share of its accommodations inventory. The company reported 800,000 listings in its Q1 '18 financials.
TripAdvisor launched in 2000, was acquired in 2004 by InterActiveCorp, came out as part of the original 2005 Expedia group, before breaking away as a separately traded company in 2011, under the leadership of Steve Kaufer of the original founding team. 2014 was a significant year strategically. The company launched its hotel metasearch feature in early 2014 before moving into tours and attractions with the Viator acquisition, and into restaurant reservations with its La Fourchette acquisition. Trip also launched its Instant Booking feature that year, as part of a bigger re-brand and push further down the purchase funnel into accommodations search-and-book.
2011- IPO/Spin off from Expedia
2014 - Instant Book launch
2014 - Viator acquisition
2014 - La Fourchette Acquisition
2018 - Rebrand to Experiences
2018 - Acquisition of Bokun
TripAdvisor continues to grow its visitor traffic year over year by double digits. Leadership claims to be the single largest travel website in the world. Trip’s heavy consolidation under a single brand offers some advantages particularly longer-run as the platform aims to cross-monetize this traffic. Much of this will come down to execution on product and marketing. Trip has the challenge of convincing travelers to use the site as a hotel booking site. We think that this re-education is achievable with the right focus on product and branding.
Seasonality. As with other sites, TripAdvisor’s revenue is highly seasonal. First quarter revenues and EBITDA margins got lift from a weaker dollar, since non-US bookings and contracts are transacted at a more favorable rate. This partly inflated leadership’s cheery hotel segment guidance. The second quarter should also see additional tailwinds. Historical exchange rate data in recent months relative to Q2 of last year.
La Fourchette revenue. TripAdvisor's non-hotel segment includes its Experiences product and La Fourchette, a popular restaurant booking site in Europe. We estimate that the site generated anywhere between 20 and 30 million Euros in 2017. The site was quoted to contribute in excess of one billion Euros to overall restaurant sales, in an interview for a French publication. The site collects a two-euro fee on confirmed reservations. The formula below is EUR 1 billion / Avg reservation value * 2.
The bigger growth story here has clearly been its Experiences business. Supply grew by 86% from Q1 2017 reaching 104,000 bookable experiences. Clocked out quarterly and assuming ample room to grow additional inventory, we see how Trip could easily double this amount by 1st quarter 2020.
Through Bokun and general efficiency gains in on-boarding new inventory, we see the compounding opportunity on revenue as significant on top of ample room to improve margins, as onboarded accounts essentially become pure margin, minus core operating expenses e.g. cloud hosting and customer services.
Commission take on activities bookings falls between 15 and 25 percent, similar to hotels. To date, Trip has achieved profitability on just four out of the 13 quarters that it had reported on the non-hotel segment. We expect more and more quarters coming into the black over time. We also expect La Fourchette to grow at solid clip, judging from the tone of media coverage coming from European publications. Overall, Trip's non-hotel segment will be the shining star going forward.
Improved funnel positioning pre and post booking including in-destination; the trusted brand supported by modest spend on television ad campaign aimed at re-educating the consumer on its hotel features; significant organic traffic; leadership position in tours and attractions; strong positioning in restaurant bookings in Europe; improved profitability and hotel conversions; growing premium subscription revenues; we expect further gains here in line with its launch of its sponsored ads solution;
Instant Book. Certain competitors including Google increasingly leverage facilitated booking for hotel and flight search. Many have written Instant Book off as lost effort. Our view is more positive and feel that it gives Trip a base to stand on as it seeks out direct relationships with the supply side. As we’ve seen with Booking and Expedia, owning supplier relationships has its advantages.
Trip’s Achilles heel is budget. Success as a hotel booking marketplace in today’s landscape is largely a direct function of marketing and advertising spend.
More acquisition-led growth with Experiences product; potential acquisition and / or new partnerships; new ad formats for hotel partners
Pull-back on ad spend from either Expedia or Booking Holdings; GetYourGuide in Europe who is said to be working with Ctrip; Google entry into Experiences segment; TripAdvisor as a mid-sized player makes it an expensive acquisition target. Again, the company would benefit with additional funding, in order to grow as a hotel booking platform. And of course - Google.
2020 could be a significant year for TripAdvisor in terms of hitting benchmarks. Top line consolidated revenue will likely surpass $US 2 billion. We also see a scenario where its non-hotel segment surpasses or approaches 50% of total revenues. This is significant because we see plenty of margin potential with its Experiences business. Trip CEO Steven Kaufer recently came out doubling his opportunity estimate for this part of the business.
This is a category in which TripAdvisor can come out as the clear winner. It owns the customer i.e. travelers use TripAdvisor in-trip for its content and reviews. Booking.com is challenging Trip's lead but Booking could experience similar challenges that Trip has with hotel bookings - namely, consumer education. Booking.com clearly owns the lower part of the hotel booking funnel. More recently it has re-focused to go full-service. This further speaks to TripAdvisor's overall advantages in having a wide footprint across the funnel pre and post booking. Research shows that a significant share of activities bookings occur in-destination as travelers plan activities and things to do. Airbnb also has potential but the company has taken a different strategy focusing on experiences that are created and managed by locals. While we think that this category has potential, the big top line gains will likely come from structured tours and activities organized by larger tour operators, museums, attractions, etc.
Will TripAdvisor scale up to challenge Booking.com or Expedia? Unlikely and clearly these two players are agglomerations of some of the world's biggest travel consumer brands. Can TripAdvisor achieve profitable long-run growth? Absolutely - but some questions remain. It's reliance on Booking.com and Expedia on advertising revenue - north of 40% is a threat, especially as these three compete in the Experiences segment. Google's entry into tours and attractions is also a very real threat, specifically via its Maps feature. Furthermore, how would a potential TripAdvisor acquisition impact its relationship with Priceline and Expedia. Online travel is a complex business fraught with threats. Omitting hypotheticals, we see TripAdvisor on a road to success.