TripAdvisor Misses Q2 Earnings on Higher Marketing Expenses

TripAdvisor Inc. TRIP reported adjusted second-quarter 2014 earnings of 48 cents per share, missing the Zacks Consensus Estimate of 53 cents. The adjusted earnings per share exclude one-time items but include stock-based compensation expense.

Revenues

TripAdvisor reported revenues of $323.0 million in the second quarter, up 14.9% sequentially and 30.8% from the year-ago period, driven by strength in click-based revenue business, continued strong hotel shopper growth, increased ad rates and strength across product suite. Also, the second-quarter revenues beat the Zacks Revenue Estimate of $320.0 million.

Revenues by Product

Revenues from Click-based advertising were $235.0 million, up 28% from the year-ago quarter and represented 73% of total revenue. Revenues from Display-based advertising were $37.0 million, up 19% year over year and accounted for 11% of total revenue. Subscription, transaction and other revenues totaled $51.0 million, up 55% year over year, and contributed 16% to total revenue.

Revenues by Geography

Geographically, on a year-over-year basis, the Americas (North America and Latin America) revenues increased 50.0% to $174.0 million, representing 54.0% of total revenue. Revenues from the EMEA (Europe, Middle East and Africa) increased 47% to $107.0 million and contributed 33% of total revenue, while revenues from the Asia-Pacific region increased 40.0% to $42.0 million, representing 13.0% of total second-quarter revenue.

International revenues accounted for 53% of total second-quarter revenue, up from 49% in the prior quarter.

Operating Results

TripAdvisor reported operating expenses of $223.0 million, up 45.8% from $142.0 million incurred in the year-ago quarter. Selling & marketing expense were up as a percentage of sales from the year-ago quarter, while general & administrative, and technology & content expenses declined. The net result was a GAAP operating margin of 31.0% compared with 38.1% in the year-ago quarter.

Reported pre-tax income was $98.0 million, up from $90.0 million in the year-ago quarter. Pre-tax margin was 30.3%, down 610 basis points (bps) year over year.

On a GAAP basis, TripAdvisor recorded a net profit of $68.0 million or 47 cents per share compared with $67.0 million or 46 cents per share in the year-ago quarter.

TripAdvisor generated adjusted net profit of $70.2 million compared with $69.5 million in the year-ago quarter. Pro-forma earnings came in at 48 cents per share, flat year over year.

Balance Sheet & Cash Flow

TripAdvisor exited the second quarter with cash, cash equivalents and short-term investments of approximately $638.0 million versus $461.0 million in the prior quarter. Accounts receivables were $185.0 million, up from $151.0 million in the prior quarter.

Cash flow from operations was $158.0 million versus $109.0 million in the year-ago quarter. Capex was $22.0 million versus $20.0 million in the year-ago quarter. Free cash flow was $136.0 million compared with $89.0 million in the prior quarter.

During the quarter, the company did not repurchase any share.

Our Take

TripAdvisor is one of the largest online travel research companies in the world. The company delivered a decent second quarter, with the top line exceeding the Zacks Consensus Estimate on the back of improved global travel market.

We are encouraged by the company's strong fundamentals, strong focus on improving its mobile products, expansion into international restaurant reservation space and improvement in traffic and hotel shoppers in the quarter.

Additionally, TripAdvisor's recent initiatives including, instant booking, will grow its user base and increase conversion rates as users are now more likely to click on the advertisers' link for booking rather than just for gathering information.

Over the long term, TripAdvisor is well positioned for growth, given its expanding user base, improving margins and increasing monetization of social and mobile platforms. However, lack of visibility, increasing competition from Priceline PCLN, Expedia EXPE and Google (GOOGL), which is expected to enter the online travel market very soon, might be a near-term concern.

Currently, TripAdvisor has a Zacks Rank #2 (Buy).