TripAdvisor, Inc. Q3 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to TripAdvisor’s Third Quarter 2021 Conference Call. At this time all participants are in listen-only mode. After the speakers’ presentation there will be a question-and-answer session. I’d now like to hand the conference over to your speaker for today, Angela White, VP of IR. Angela, please go ahead.

Thank you, Jay. Good morning, everyone, and welcome to TripAdvisor’s third quarter 2021 financial results call. Joining me today are Steve Kaufer, CEO, and Ernst Teunissen, CFO and Chief Executive, Viator, TheFork and Cruise Critic. Last night after the market closed, we distributed and filed our third quarter 2021 earnings release and made available our shareholder letter on our Investor Relations website. In the release, you’ll find reconciliations of non-GAAP financial measures to the most comparable GAAP measures discussed on this call. Also on our Investor Relations website, you’ll find supplemental financial information, which also includes reconciliations of certain non-GAAP financial measures discussed on this call, as well as other metrics. Before we begin, I’d like to remind you that this call may contain estimates and other forward-looking statements that represent management views as of today, November 9, 2021. TripAdvisor disclaims any obligation to update these statements to reflect future events or circumstances. Please refer to our earnings release as well as our filings with the SEC for information concerning factors that could cause actual results to differ materially from these forward-looking statements. With that, I’ll turn the call over to Steve.

Thank you, Angela. Good morning, everyone. So before I turn the call over to questions and further commentary from myself and Ernst, I wanted to speak to my transition news. Last night, as you undoubtedly heard, I informed investors and our employees of my intentions to step down from the company as CEO at some point in 2022, or as soon as a successor is named by our board of directors. I co-founded TripAdvisor in 2000 with three other amazing people, Nick Shanny, Langley Steiner and Tom Palka. Our goal was to help people plan and take extraordinary vacations all over the world, powered by the knowledge of people like you who have been there before. Now, while there’s never a perfect time, I feel very comfortable that now is the right time for me to announce my transition, with the hospitality industry successfully emerging from the pandemic, the company profitable again, and strong leaders in the company. We were successful in using the time afforded to us during this pandemic to reinvent ourselves, delivering an enhanced focus on our experiences and dining sectors, and creating and launching our first subscription product. We have a clear set of priorities. And while we have a lot of work ahead to get there, we have a terrific set of team members who I know are up to the challenge. This company has already changed the way billions travel and it is extraordinarily well positioned to create and deliver a new set of innovations in the years and decades ahead. As a trusted global brand, as the most popular travel website and as a major influencer in a $5 trillion industry, we are still a story of upside potential in a massive and really fun category. As I said yesterday to my TripAdvisor family, the work continues. I have complete confidence that our experienced board of directors will select a great successor and that TripAdvisor’s next chapter will be just as exciting as the amazing journey of the past 20-plus years. In the meantime, I will remain at the helm as fully engaged as I am at driving innovation, building teams and helping our customers. With that, I’ll turn it over to Ernst before we take your questions.

Thanks, Steve. Thanks everyone for joining. We were very pleased to see our revenue and adjusted EBITDA step up significantly this quarter from last quarter, reflecting signs of a continued strong return to travel. We’re very pleased to see the recovery in consumer travel continue. This is reflected in the gradual return to 2019 levels we’ve seen over the last few quarters in some pockets. As we noted in our shareholder letter, we’re actually starting to meet or surpass 2019 levels in certain areas. Revenue in the third quarter was $303 million, reflecting year-over-year growth of 101% and reaching 71% of 2019 levels. We call out that our experiences and dining revenue in particular is showing a very strong recovery that is not fully reflected yet in Q3 revenue. For instance, on a booking level, our combined experiences businesses have been up versus 2019 in October and the start of November. We’re not out of the woods yet with COVID; it’s still impacting us, and although we’re cautious about Q4, we remain very optimistic that the recovery is taking root and we are bullish about travel and our business in 2022. With that, let’s jump into Q&A.

Thank you. Our first question comes from the line of Naved Khan with Truist Securities. Your line is open.

Hi, thanks a lot. Steve, we’re going to miss you after the transition; it came as a surprise. Hopefully we’ll see you for the next call as well. I just had a question on the comments in the letter where you said you’re considering options to crystallize the value of Viator. Maybe elaborate a bit on the range of possibilities here? Does it include a potential spinoff or potentially a sale of the business or is it more around optimizing this for growth and margins?

Naved, this is Ernst. I will take this one. We have two very strong assets in Viator and TheFork; they were strong growth companies before the pandemic. They’re category leaders in their markets. Viator is a global leader in experiences and has a very large total addressable market. TheFork is a European leader in restaurant reservations, increasingly moving into more FinTech areas with TheFork Pay and gift cards. And now both are recovering very nicely and beyond our expectations. We believe they come out of the pandemic with an even stronger competitive position and strong leadership teams that operate with great autonomy within TripAdvisor. Now clearly, the financial profile of these businesses is very different from our core TripAdvisor business. They have higher growth, but also lower profitability due to investment opportunities that we’ve been capitalizing on. They also have clear, identifiable and proven lifetime value that we can ascribe, versus the CPC and media model that we have in TripAdvisor, which makes us more comfortable to spend for long-term benefit — particularly for Viator, where we’ve been investing significantly in 2021. Pure-play category winners like Viator and TheFork in private and public markets often get revenue- or gross profit–related valuations rather than EBITDA multiples, which is a different lens than how we believe TripAdvisor stock tends to be valued. That difference in valuation frameworks would make it easier for us to invest appropriately in these businesses and make acquisitions in these categories. So essentially, we believe there are options to better crystallize the right valuation for these businesses, which we don’t believe is currently reflected. We are not outright sellers of either asset in the near term, and especially in the case of Viator, there’s strategic importance to TripAdvisor having a significant influence due to the importance of experiences to the TripAdvisor value proposition for our consumers. We also think there’s a growth opportunity for both Viator and TheFork over the years to come that we definitely want to be part of. But there are some options. One area would be to enhance disclosure in our segment reporting, but there’s also a family of options that we are considering that go further in separating out and separately financing these businesses. We haven’t committed to any particular course of action yet, but we wanted to give you a heads up that we are considering options over the months and quarters to come.

Super helpful. Maybe just a related question. If I look at the sales and marketing line as a percentage of revenue, it was higher than what we had expected and I guess you’re obviously using some of the funds to grow these businesses, both experiences and dining. How should we think about investment levels in 2022 as it relates to Viator and dining?

Yes. As I said before, for Viator we have this year pushed further into our lifetime value model. We feel pretty confident from historical consistency in how users come back and how they repeat, and so we feel confident to spend beyond just the immediate return. That of course has a near-term impact and increases advertising spend, but it’s actually good for long-term revenue and is ROI positive over a longer timeframe. We have gladly done this year and have been very pleasantly surprised how much we could put to work at good ROI levels and grow the Viator business. We’ve been successful in expanding the marketing program in that way. So it is a near-term increase in marketing as a percentage of revenue, as you highlight, but we think it’s a good ROI and it cements the very strong position that we have. You saw sales and marketing as a percent of revenue tick down in Q3 from Q2. We leaned into the experiences side while tapering a bit on the hotel side in Q3 and through October and into Q4. For Viator, we will continue to spend as long as we see good ROI.

Thank you. Next question comes from the line of James Lee of Mizuho Securities. Your line is open.

Thanks for taking my questions. Steve, thanks for your leadership over the years. Maybe can you talk about your decision to make that transition next year and also, in terms of finding a successor, what kind of background and experience you and the board are looking for? Is it more travel related or more technology related? Thank you.

Sure. Thank you, James. As I mentioned in my opening remarks, while there’s no perfect time, I think this is a very good time to be able to start the transition, and my hope is for it to be as smooth as possible sometime in 2022. I certainly wasn’t going to make any move over the past 18 months — it was a traumatic period across the travel industry. But when we look at our future now, we see us clearly coming out of the pandemic, we love the new initiatives at play at TripAdvisor, and overall the business is recovering in all its parts. So it’s a pretty good time. I think we have a strong management team with both new and tenured faces. To the second part of your question, what the board is looking for: travel experience would be great, subscription experience would be great, e-commerce is a core part of our business today and going forward. There’s no reason to read anything into this other than what it says on the face: the company is in a good position. I’ve been at the helm for — by the time I depart — will be about 22 years. It’s a good opportunity and there’s tons of potential in front of the company. This isn’t a question of needing change; it’s a question of timing and giving the board plenty of time to select truly the best leader because it’s a gem of a company with a ton of upside.

Thank you. Next question comes from the line of Jed Kelly of Oppenheimer. Your line is open.

Hey, great, thanks for taking my questions. Just two if I may. First, just to understand the sales and marketing this quarter — I think it was roughly 90% of our 2019 levels. Can you speak to whether that is being more invested in the core hotel platform and subscriptions or experiences and dining? And secondly, can you just speak to the change in the subscription policy going forward and sort of how you think about TripAdvisor Plus into 2022? Thank you.

Hey Jed, I will take the first part and then hand over to Steve for the second part. In terms of advertising, yes, we’ve leaned into marketing for Viator given the good ROIs we’ve seen, and we saw good ROIs in our hotel business as well. CPCs have been strong and our hotel business in the third quarter, particularly in the U.S., was very strong — our U.S. performance was above 2019 in the quarter. We’ve seen favorable pricing levels which always disproportionately favors pay channels, so we’ve been able to lean in there as well. As I said, on hotels we started to taper that in October and further into Q4. We wanted to spend into the holiday season. Over the longer term, we expect that to start to normalize again for the hotel business; it’s a phenomenon of good CPCs.

Thanks, Jed. I’ll take the second part regarding Plus. I couldn’t be more excited about what vacation funds as a change in the model can deliver for our travelers and for our suppliers. Remember, the original instant savings model had us offer a discount rate upfront, but that caused supplier-facing problems we hadn’t fully anticipated. When we heard that feedback and supply became constrained, we shifted. We’re now beta testing with vacation funds, which offers hotel rates at retail while providing the same economic benefit to the traveler that comes later at the actual stay. We are working on the flows to make sure that’s well understood — it’s literally the same cash benefit that the end user gets. They might receive $150 back or $300 back based on where and how long they stay. After the traveler makes the stay, they get pinged that their vacation funds are now available in their account, and they can use them to stay an extra night, dine at a restaurant, save them for the next trip, or transfer to their bank account. For TripAdvisor, this unlocks supply. We’re able to get a lot more hotels available for sale as part of a Plus offering than we were before, because we’re not asking hotels to load a special discounted rate; this uses regular retail rates and is rate-parity safe. That makes it easier to onboard independent properties, and it’s easier on the hotel operationally. We can highlight great discounts in our sort order, delivering strong value to customers. How we think about it in 2022: we remain focused on the U.S. market to ensure product-market fit before expanding internationally. The U.S. is a very large market and plenty big for testing. We’ll continue iterating until we have that fit and then go international.

Thank you. Next question comes from the line of Deepak Mathivanan of Wolfe Research. Your line is open.

Great, thanks for taking the questions. Steve, we will miss you. A couple of follow-ups on Plus. First, have your conversations with hotel chains and OTA partners after the model change announcement improved? Are they more comfortable to come on board? Should we expect meaningful change in participation? Second, related to economics: you’re funding the perks for travelers and offsetting that with commissions you get from hotels — how does this compare to cost per click? Do you think this model is accretive under this arrangement?

Thanks, Deepak, and thanks for your kind words. On conversations with hotel chains: when we were doing instant discounts, we needed chain participation or chain blessing because the rate was below what was on their own site, and that proved to be an issue. Now that we’ve moved to a retail model, we would appreciate chains participating but we also see a lot of chain properties already on the system showing the exact same rate as brand.com because we’re representing regular retail rates. That avoids rate parity concerns and allows us to access inventory through aggregators and channel managers — for example through our partnership with Trip.com and other aggregators — so we can represent many properties, including major chains, in a rate-parity-safe manner. Some chains will join now and some later, but we don’t need every chain to participate to have a compelling offering. On economics versus our CPC model: we believe this can be accretive. A challenge with the CPC model is that many users browse but don’t book, and those non-booking clicks dilute the value of future clicks. With Plus and the Plus transaction flow, we can convert more of those browsers into our own transaction funnel. If a traveler pays $99 for a subscription and then receives $150 back on a booking, we still capture the subscription revenue that we didn’t have under CPC. Additionally, Plus members are more likely to start their trips on TripAdvisor and to return, which drives repeat bookings and incremental revenue over time. We will monitor the interplay between Plus and CPC carefully to ensure the conversion flow more than makes up for clicks that don’t go to meta partners.

Thank you. Next question comes from the line of Brian Fitzgerald of Wells Fargo. Your line is open.

Thanks, guys. Steve, congratulations and we will miss you. A couple things I want to ask about: the pullback that you saw in September — was that consistent across regions? Did Europe stay strong in September? And then on Plus, have you seen any early indications or dynamics in terms of customer cohorts — are Plus members converting into other product usage such as experiences, Viator or TheFork better than the average user?

I will take the first one, Brian. In terms of September, we saw more of an impact in the U.S. from the Delta wave; Europe had been recovering and caught up from a traffic perspective in Q3 and we saw revenue improve throughout Q3 including September. It’s possible growth would have been even stronger without Delta, so we saw a more pronounced step back in September in the U.S. in the experience of that wave. In October we saw activity move up again in the U.S., but that was the geographic impact we experienced.

Thanks. Regarding Plus and cohorts, candidly, we’ve been focused on shifting to vacation funds and ensuring we present the value proposition clearly to travelers. We haven’t yet concentrated on building out cross-product cohort analysis at scale, such as whether Plus subs are converting more into experiences, but it’s something we will watch closely as we expand the program.

Thank you. Next question comes from the line of Mario Lu, Barclays. Your line is open.

Great, thanks for taking the questions. A couple follow-ups on Plus. You mentioned some hotel chains and aggregators were added to the platform. Any way to help quantify how meaningful the number of hotels added to Plus was after the change to vacation funds was made? And on the customer side, any color on whether this change impacted conversion or user engagement?

Thanks, Mario. Those are exactly the kinds of questions we are studying. I can say that we’re able to tap into significantly more inventory because vacation funds allow retail rates to be used. For example, Trip.com has a large amount of properties at regular retail rates that we can now show; under the instant discount model we were more limited. Similarly, other aggregators and channel managers have been easier to work with because we don’t require a special discounted rate for TripAdvisor. We also have many independent properties that were already connected to our back end; by not requiring a negotiated special discount we were able to bring many of those properties live much more quickly — in the thousands, in aggregate across different independent suppliers. On conversion and engagement: we can’t yet offer a meaningful public metric because we’ve rolled out to a fraction of our U.S. audience and we’re still working through flows, copy, UX and bug fixes. Conversion is key and as we improve the experience and broaden the rollout we will have more to share.

Thank you. Next question comes from the line of Tom White of D.A. Davidson. Your line is open.

Thanks so much. This is Travis for Tom. First question: I was wondering about your monthly unique user trends in Q3. It seemed to improve and sort of aligned with the trajectory of revenue recovery. Could you talk about what you’re seeing in terms of user engagement — specific regions, the type of trip, willingness to book and spend — and whether these engagement patterns differ meaningfully from earlier in the pandemic? And then a second question on the hotel/media segment: you mentioned monthly revenue dipped a little in September versus July and August as a percentage of 2019; could you elaborate on that and how October looked for that segment?

Yes. We saw a step up in users as a percentage of 2019 in the third quarter: we were about 70% in Q2 and moved to 76% in Q3. The most important trends are geographic: the U.S. was clearly ahead in traffic recovery in Q1 and Q2, and Europe really caught up in Q3. So in Q3, Europe and the U.S. were similar as a percentage of 2019. The rest of the world has been much slower to recover and that’s dragging down the overall 76% versus 2019 that we reached in Q3. Regarding the dip in September, as someone asked earlier about Delta, we saw an impact in September in the U.S., which affected the hotel/advertising metrics. CPCs remained strong in September, and partner behavior in the auction was consistent, but volume was impacted. October showed improvement in the U.S. from September. We also tapered some marketing in October into Q4, so you should consider marketing cadence when thinking about those month-to-month moves.

Thank you. Next question comes from the line of Vince Cipiel of Cleveland Research. Your line is open.

Great, thanks for taking my question. Curious, when you look at the existing base of TripAdvisor Plus members, it’s still a newer program — do you see anything interesting in terms of engagement or repeat booking activity of Plus members versus the average user on TripAdvisor?

Good question. We do see repeat bookings from Plus members, which is encouraging. However, it’s hard to separate whether those are inherently frequent travelers who would have repeated bookings regardless, because we don’t always observe the full booking path when bookings go to external partners. Still, it’s positive to see repeat bookings among Plus members — people are coming back and booking more, and that benefits us. We will get better data points with the vacation funds model, which we believe may encourage people to save for their next trip or to do additional purchases on TripAdvisor because they’re accumulating value. Some members have described it as akin to a travel jar: saving up extra money to spend on a trip. We think vacation funds will tap into that mindset for a segment of our audience and increase repeat behavior.

Thanks. And my second question: you mentioned hotels would pay a commission similar to what they pay other OTAs but might also provide an amenity or an upgrade. How does this channel compare in total cost relative to other distribution channels for hotels participating in Plus?

Excellent question. We’re flexible on the hotel side. For independent hoteliers, we might have a minimum commission, and we also point out that the visibility and value we present on TripAdvisor could deliver more bookings. For some properties, a commission we negotiate with them may be lower than what they pay other OTAs, making TripAdvisor a cost-effective channel for them. On perks, many properties find it easy to add a modest amenity — a bottle of wine, a fruit plate, or an upgrade if available — and that small cost often helps the property stand out and receive more bookings. Those amenities can also be redeemed on property using vacation funds, which hotels like because they drive on-property spend and guest satisfaction. Participation is optional, and hotels decide whether to offer the perk in exchange for increased demand.

Thank you. Next question comes from the line of Kevin Kopelman of Cowen. Your line is open.

Thanks so much. Could you talk about how you think about TV advertising and whether, now that we’re in the recovery, you’d consider returning to TV? And also, could you give any more color on how experiences and dining did in October relative to Q3 bookings and revenue trends?

On TV advertising: we have an extremely highly qualified audience already on our site at the point of shopping where we can educate and convert without incremental mass media spend. While TV can be effective for broad brand awareness, we prefer to demonstrate product-market fit and show the growth metrics before we put large-scale media behind Plus. Once we can show that this is accelerating meaningfully, it could make sense to add TV or other broader channels. As for experiences and dining: we saw a bit of an impact from Delta in September on experiences, but experiences roared back in October and did very strongly. On a bookings level — which is a leading indicator of revenue because revenue recognizes at consumption — combined experiences bookings were above 2019 levels in October and into early November. That’s a very encouraging signal that this part of the market is recovering strongly and that our position is favorable.

Thank you. Next question comes from the line of Doug Anmuth with JP Morgan. Your line is open.

Good morning. This is Dave on for Doug. Thanks for taking the questions. First, regarding your strong performance in experiences, are you seeing evidence that travelers are increasingly booking ahead because of the pandemic, and is that shift accelerating adoption of online booking for experiences? Second, in the letter you talked about removing the paywall to see savings on hotels for travelers coming to your site — can you elaborate on what you meant by that?

Thanks. On the first point, we see several important trends. One pandemic-driven trend has been stronger domestic consumption of experiences and a shift toward more outdoorsy activities — water sports, hiking, etc. That opened up a large market and deepened our relevance in niches beyond city-based experiences. We expect those behaviors to stick. City and international travel are coming back but lag; when they return fully, they will be additive to the recovery. More broadly, there’s a macro trend toward consumers planning and booking more of what they’ll do on vacation online. Experiences were historically the last major travel category to come online, and COVID accelerated adoption due to the desire to know what’s open and safe. So we see both increased planning ahead and improved ability to book while on trip via mobile — meaning we can capture both advance bookings and on-trip purchases. Regarding the paywall comment: under the instant savings model, some properties required customers to buy Plus before they could see certain rates or discounts, which created a paywall and was a barrier to adoption. The vacation funds model eliminates that paywall: travelers see retail rates upfront and learn they’ll receive vacation funds after their stay. That removes the friction of having to buy a subscription before seeing all the value.

I would add that we’re playing to a macro trend of people wanting to do more on their vacations combined with the convenience of booking on mobile. We believe COVID accelerated the necessity and habit of booking experiences online, and Viator is well positioned with great supply and distribution to benefit over the long term.

Thank you. There are no further questions at this time and I would like to turn the call back to Steve for closing remarks.

Terrific. Well, thank you. Thank you everyone. A very special thank you to all the TripAdvisor team members all around the world who continue to put their all into helping hospitality businesses and travelers and diners emerge from this pandemic. We’re quite optimistic. We’re extremely optimistic about the recovery of our industry and look forward to updating you next quarter on our core businesses and all of our new initiatives. Thank you again and stay safe.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect. Have a great day.