TripAdvisor Earnings Review Videograph Q3 2014

  • TripAdvisor beat revenue estimates, but missed adjusted EPS estimates.
  • TripAdvisor profit margins could slide further in Q4 2014.
  • TripAdvisor valuations are expensive, making TRIP a risky bet.

TripAdvisor, the online travel site, announced its earnings for Q3 2014 on 4 November. The stock tanked by over 14% following the earnings release on the back of a miss on the earnings front, a lower profitability projection and lowered growth guidance in its largest revenue segment. Prior to the announcement of results as well, TripAdvisor valuations were expensive. The stock is now down by close to 12% from its pre earnings level. However, TripAdvisor valuations continue to remain expensive even now, and also when compared with other sector stocks in OTA space.

TripAdvisor Earnings Q3 2014 – Estimates vs Actuals

TripAdvisor registered a revenue of $354 million and beat estimates but missed earnings estimates by a huge margin. We had anticipated lower earnings from TripAdvisor during Q3 in our earlier coverage of the stock. However, the fall in margins was more than expected.

Estimates

Actuals

Beat/Miss

Revenue ($ million)

348.8

354

1%

Adjusted EPS ($)

0.6

0.48

-20%

TripAdvisor which is expanding into other verticals has been spending on online and TV advertising, one of the reasons for the lower profitability in Q3, and the lower full year EBITDA guidance (Earnings Before Interest Tax Depreciation and Amortization).

TripAdvisor Revenue Growth

TripAdvisor’s revenue grew at an accelerated rate of 38.7% YoY (over Q3 2013), partly due to a slightly weaker Q3 last year when the company rolled out its meta-search feature, resulting in lower clicks but potentially higher conversions.

TripAdvisor’s topline also had the benefit of contributions from the recently acquired local tours and activities site, Viator. Sequential growth (over Q2 2014) was strong at 9.6%, higher than the average over the last couple of years.

TripAdvisor’s revenue growth was driven primarily by its click based advertising segment. Growth in this segment has been accelerating over the past two quarters. In the 2 year period prior to Q2 2014, the average YoY growth rate for this segment was 18%, much lower than the 29% and 31% registered in Q2 and Q3 2014. Being its biggest revenue stream, the strong growth is a positive. The full year revenue guidance for the segment is down from an earlier outlined high-20’s growth, to a mid-20’s growth. However, that’s still better than the growth in periods preceding Q2 2014.

% of Revenue

YoY Growth

Click-based advertising

70%

31%

Display-based advertising

10%

16%

Subscription, transaction and other

20%

101%

Growth in TripAdvisor’s subscription, transaction and other revenue segment spiked in Q3, compared to the average growth of 60% over the last year. The site has clearly been focusing on mobile users, with meta-search and mobile bookings features. In Q3, TripAdvisor’s average monthly unique visitors on smartphones and tablet grew by about 48% YoY, to reach 161 million. The full year guidance for this segment has also been upped from an earlier high-60’s growth to a high 80’s growth, implying a Q4 YoY growth upwards of 95%.

The results of this segment are a big positive for TripAdvisor and holds significant potential as the site rolls out its Instant bookings feature on desktops. Besides, the feature is yet to be made available outside the US.

TripAdvisor Profit Margins

TripAdvisor’s operating and net income of $84 million and $54 million respectively, were flat YoY despite the huge revenue jump during the period.

TripAdvisor’s operating and net profit margins came in at 23.7% and 15.3% respectively, marking a significant drop from margins of 33% and 22% a year ago.

The drop in profitability comes on the back of TripAdvisor’s spends on TV and online advertising, leading to a sales and marketing expense of about 45% of revenue, up from 38.5% in Q3 last year.

Owing to the cyclical nature of TripAdvisor’s business, Q4 is typically a weak quarter in terms of revenue growth. So, going into Q4 2014, one would expect margins to drop further.

TripAdvisor generated an operating cash flow of about $59 million in Q3 and ended the quarter with cash and cash equivalents of $491 million.

TripAdvisor Guidance

Total revenue growth high-20's to low-30's
Click based revenue mid-20's
Display based revenue mid to high teens
Subscription, transaction and other low 80's
Adjusted EBITDA growth low 20's

Based on the guidance, assuming a 30% revenue growth for FY 2014, TripAdvisor’s full year revenue could come in at about $1.23 billion, beyond analyst estimates of $1.2 billion. Revenue in Q4 2014 could come in at about $283 million, marginally lower than consensus estimates of $290 million.

TripAdvisor Valuation

TripAdvisor currently trades at $74 a share. TripAdvisor valuations are as follows:

  • TripAdvisor PE ratio – 49
  • TripAdvisor Price to Sales ratio – 8.8

TripAdvisor valuations have corrected post the recent earnings release. TripAdvisor has delivered strong revenue growth and shows potential for further improvement on that front. However, current valuations are expensive and make the stock a risky bet, especially when viewed in the light of declining profitability. Our TripAdvisor stock analysis has a more detailed view of the company’s fundamentals.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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