On the 11th of Feb, 2014, online travel research company, TripAdvisor (NASDAQ: TRIP) is scheduled to report earnings for its 4th quarter, traditionally the weakest quarter for the company and its peers. As the earnings release draws closer, the question on everybody’s mind is, ‘How much of an impact will the new Meta-search feature have on the company’s margins?’. The new feature retains visitors on the TripAdvisor site rather than diverting them to advertisers’ websites until the booking stage. This though, is a double edged sword. If the ROI for advertisers is seen dropping, it could lead to long term issues for TRIP.
A deceleration in revenue from the ‘click based advertising’ segment in Q313 compared to the earlier quarters in the year, has quite a few people worried.
In the first three quarters of FY 2013, the company's revenue grew at an average YoY rate of 16.5%, with revenue in each quarter having improved in YoY terms when compared to the subsequent quarter a year ago. The company’s average operating margins in FY13 so far have remained rather stable at about 36% albeit with a marginal drop when compared to the margins prevalent a year ago. A look at the net margins reveal that the story is quite the same at an average 25% in FY 2013 so far.
|Q1 2012||Q2 2012||Q3 2012||Q4 2012||Q1 2013||Q2 2013||Q3 2013|
|Total Revenue ($ millions)||183.7||197.1||212.7||169.4||229.9||246.9||255.1|
|Cost of revenue %||1.5%||1.5%||1.4%||2.1%||1.6%||1.7%||2.0%|
|Selling and Marketing %||36.7%||32.6%||31.8%||39.5%||34.5%||33.4%||38.5%|
|Technology and Content %||9.7%||10.9%||11.1%||14.0%||12.5%||12.9%||13.5%|
|General and Administrative %||8.8%||9.3%||9.4%||12.4%||9.8%||10.3%||9.6%|
|Depriciation and Amortization %||3.3%||3.3%||3.0%||4.2%||3.2%||3.4%||3.6%|
|Operating Income %||39.9%||42.4%||43.4%||27.7%||38.4%||38.1%||32.8%|
|Net income %||26.2%||27.0%||28.0%||19.9%||27.1%||27.1%||21.9%|
The company’s revenue comes from 3 segments at large, all of which are listed below along with their contributions in FY13 so far:
• Click Based Advertising – 75%
• Display Based Advertising – 12%
• Subscription, transaction and others – 13%
In Q3 2013, the company’s contribution of revenue from the APAC region grew at the fastest pace with the region accounting for about 13% of revenue. APAC which accounted for a paltry 3% of revenue in the first couple of quarters in FY10 has since, grown at a much faster rate as compared to the other regional contributors. North America which accounted for about 67% of the company's revenue during the first quarter of 2010 now accounts for about 51% of the revenue in Q313.
Analysts’ consensus estimates peg the revenue for Q413 at $ 205 - 206 million. Analysts predict that the declining trend in margins is likely to continue owing to certain advertising campaigns that the company has taken up in the US, accompanied by the company’s new Meta-search. The platform collates data from its advertisers’ websites and allows users to seek out bulk of the information without having to be redirected to the advertiser’s website, as was the procedure prior to the introduction of the feature. Though this is expected to increase the conversion rate in the long term, with travellers visiting advertisers’ websites for bookings rather than just gathering information, speculation is that TripAdvisors drop in click based advertising is due to visitors directly visiting the relevant website once they have the information they need. This could turn out be a cause of ongoing concern given that the segment is their largest source of revenue.
When compared with Expedia (NASDAQ:EXPE) and Priceline (NASDAQ:PCLN), TripAdvisor's revenue growth rate, although only marginally lower than that of Expedia, has been the slowest of the 3 companies in FY 2013 thus far. Though its margins, both operating and net, have been far better than those of Expedia and comparable to those of Priceline, the concern remains its revenue growth. Despite its revenue base being much smaller, growth rates have not beaten, or even matched for that matter, the growth rates of the other two companies.
At its current price of $84 per share, if the company meets revenue and EPS expectations in Q4 2013, it will be trading at a P/S multiple of 14 and a P/E multiple of 50, both of which call for a significant correction.
|LTM Sales ($ millions)||6,752||4,771||938|
|Market Cap* ($ millions)||62,120||9,800||13,090|
|Adjusted LTM EPS ($)||41.01||3.25||1.68|
* As on Feb 10, 2014
Note: Estimated values for PriceLine & actuals for Expedia and TripAdvisor for Q4 2013
From an investor's point of view, for the stock to become attractive, we would expect a price correction even if we were to ignore the expectations of lower profitability in Q4 2013. We will discuss TripAdvisor's stock price and valuations further in our Q4 2013 earnings review.
To see TripAdvisor’s latest stock price movement, click here (NASDAQ:TRIP)