TripAdvisor, Inc. Q2 FY2022 Earnings Call

Good day and thank you for standing by. Welcome to the Tripadvisor Second Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Angela White, Vice President of Investor Relations. Please go ahead.

Thank you, Michelle. Good morning, everyone, and welcome to Tripadvisor’s second quarter 2022 financial results call. Joining me today are Matt Goldberg, President and CEO; and Ernst Teunissen, CFO and Chief Executive, Viator, TheFork and Cruise Critic. Last night, after market close, we distributed and filed our earnings release and made available our shareholder letter on our IR 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 IR 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 certain estimates and other forward-looking statements that represent management’s views as of today, August 5, 2022. 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 Matt.

Thank you, Angela. Good morning, everyone and thanks for joining us today. I’m excited to be here. I’ve been looking forward to my first earnings call with Tripadvisor. It’s an exciting time to join this iconic company, given the travel environment over the last few years, the trajectory of recovery in the sector, the return of the leisure traveler and the potential to serve consumers in new and unique ways as they look to satisfy their growing demand to get out and experience the world. As you read in the shareholder letter, we had a strong quarter. Our Viator experiences focused offer stood out in its pace and level of recovery at 160% of 2019 levels. TheFork achieved 103% relative to 2019 and the recovery in our core Tripadvisor hotels offering improved at 89% in the quarter, up from 63% last quarter. Since this is my first call as CEO, I wanted to take a step back from the quarterly results and share some high-level perspectives and reflections from my first 30 days, including why I wanted to return to the travel sector and the opportunities I saw at Tripadvisor. I am personally passionate about travel and the meaning it brings to us all. By opening us up to different cultures and perspectives and the higher purpose that it serves by reminding us how much we all have in common at our core. The travel industry has always captured my professional attention as a category ripe for innovation and growth. The size of the market is massive and the sector continues to go through constant change marked by an evolution in the democratization of travel information and distribution. This creates a compelling opportunity to reimagine the consumer experience by solving problems in what is often a fragmented and frustrating ecosystem. When Tripadvisor launched back in 2000, it introduced a unique and disruptive offering to the market that pioneered a new way to enable travelers to decide where they want to go and discover trusted resources to make it happen. The Tripadvisor I joined today is fortunate to have a strong and stable foundation and an enduring set of assets, our trusted brand, a large global audience, a scalable content model, a rich set of data and passionate teams committed to our future. It sits squarely in the category of experiences over material consumption, a secular trend that we can expect to continue. My mission, simply stated, is to make sure we continue to evolve the company, so that we can serve travelers, diners and experience seekers for decades to come. While I recognize that we operate in a competitive space with external pressures, there are a number of advantages that attracted me to the opportunity. First, Tripadvisor is a company that I have long admired, both as a traveler and a travel industry executive. I saw the opportunity to follow a visionary founder and identify new ways we can be disruptive by reimagining the future of travel at a time when consumers are looking for trusted guidance. I also looked at the company’s portfolio. We have a collection of diverse assets in Viator and TheFork as well as core Tripadvisor that allow us to participate across travel experiences and business models. As the pace of change increases, this can play a meaningful role in how we serve consumers in unique and seamless ways. Given my background in digital media, something that jumped out to me as truly differentiated and valuable at Tripadvisor is the community of like-minded people, actively contributing content to help their fellow travelers make the most of every experience. This has created the world’s largest travel guidance platform built on a relationship of trust with over a billion reviews and hundreds of millions of visitors every month. With this scale, I was also energized by the potential of our data assets to create a better experience for consumers and enable all areas of the company. Having spent a number of years leading advertising, content and commerce businesses enabled by data, I’m confident that our data can help us drive deeper consumer insight and higher levels of engagement, create further operational agility, as well as identify meaningful commercial opportunities. Perhaps most importantly, one final attribute that attracted me to Tripadvisor was the culture and people. Tripadvisor has a culture that attracts talent with a passion for purpose and a highly skilled, knowledgeable and capable team. Over the past months, I’ve enjoyed spending time with teams across the organization and just wanted to say thanks for welcoming me with such enthusiasm. At this early point in my tenure, I can say that my excitement for the opportunity in front of us has only grown stronger, and I’m looking forward to rolling up my sleeves, engaging with our talent, and charting our course for the future. One area of clear focus is driving stronger and more effective execution. In the coming months, we will align our strategy, operating model and teams to deliver against our goals in a structured and rigorous manner. I expect to empower our leaders and their teams to ideate, execute, and enable every employee to do their best work. I believe that building a foundation of trust with all our employees and stakeholders is critical as we set the framework for our future together. I’m also looking forward to connecting and collaborating with our customers, partners, industry peers, and shareholders to understand their perspectives and help us better serve consumers. As we pursue our next phase of growth, we are well positioned to build on our foundation, as we strengthen the essential role we play in the travel ecosystem. I will aim to be clear about our plans, communicate transparently as we go and identify milestones along the way. In the meantime, I look forward to meeting many of you soon and sharing more in the coming months. With that, I’ll turn the call over to Ernst.

Thanks, Matt, and welcome to your first earnings call with us. To echo Matt, we had an impressive quarter, and we are pleased with the continued demand recovery, as well as the strong execution by our team. I think the results speak for themselves. In addition to what Matt highlighted, we reached 99% of our 2019 revenue in Q2, a strong step up from the 70% in Q1, and our adjusted EBITDA was $109 million or 26% of revenue. Both revenue and EBITDA exceeded our expectations. Free cash flow in the quarter was $282 million, and we had a little over $1 billion of cash on our balance sheet at the end of the quarter. Despite the news flow on macro factors, such as inflation, recession fears, and consumer sentiment, travel has been, and continues to be strong. While U.S. travel strength continued this quarter, we also saw Europe coming back very strongly. We saw progressive improvement of revenue as a percentage of 2019 each month of Q2. At this time, we expect to be able to report further improvement in Q3. This expectation includes a currency headwind versus 2019 that we expect in the back half of roughly 4% impact on 2019 recovery. Within that, about 10% impact versus 2019 recovery for TheFork, whose revenue is predominantly in Euro. We covered a lot of specifics about drivers of performance in our shareholder letter, which we posted last night. Rather than go through all the specifics, I wanted to highlight a few salient points here. Our new Tripadvisor Core segment has continued on its path to 2019 recovery, reaching 84% of 2019 revenue in Q2 and is on track to do better again in Q3. This is with about a 3% drag from revenue lines that were discontinued or no longer consolidated. I highlight that our hotel auction was about 100% of 2019 in the U.S. and Europe, which is pleasing. I also highlight that we are narrowing the gap with media and hotel B2B, two revenue streams that we have reported in the last quarter as slower to recover. We expect these revenue streams to progressively do better and ultimately intersect with their pre-pandemic trajectory, although our hotel B2B business may not get there this year. While we’re pleased with our performance and the recovery trends, we believe that the mix of our offers within TA Core including our waiting to hotels rather than alternative accommodations and the slower recovery in B2B and media that I just mentioned has been a relative headwind for core Tripadvisor. We’re confident, however, that we have the levers to improve our performance going forward and believe that we have the assets within our portfolio to drive attractive and profitable growth for core Tripadvisor. Notably, our core Tripadvisor segment exceeded pre-pandemic EBITDA margin levels in Q2, even with revenue still trailing 2019. This is a testament to the fixed cost reductions we effected during the pandemic. Our new Viator segment is showing remarkable growth, 60% growth versus 2019 in the quarter, 240% revenue growth year-over-year. In Q3, we expect to improve our performance again. Despite the lot of growth investment, our adjusted EBITDA margin in this business slightly improved versus 2019 this quarter and improved strongly versus last year. Our new TheFork segment also exceeded 2019 levels in Q2 and is set to improve again in Q3. Studies indicate that the European restaurant industry as a whole has not fully recovered yet with fewer restaurant openings than in 2019, and staff shortages. This makes it all the more promising that TheFork, with its ability to drive more volume for restaurants, is exceeding 2019 levels already. We have provided you with a series of documents, including a memo outlining the technicalities of our segment change and the historical presentation of segment numbers that will provide a lot of the specifics. Let me just highlight the why of this change here. First, the segments are a good reflection of how we are currently thinking about and managing our business. These three segment P&Ls, Tripadvisor Core, Viator, and TheFork reflect the true standalone economics with market-based commercial agreements between them and overhead allocations. The segment reporting highlights that we manage Viator and TheFork for high growth and future rather than current margin. It’s also a reflection that we see great opportunity in managing brand Tripadvisor more holistically around a central user experience rather than in verticals. Despite operating these segments as separate segments, we also derive significant benefit from the intersections Viator and TheFork provide great and very strategic access to bookable supply for Tripadvisor Core, and Tripadvisor Core provides a significant volume of additional leads and demand to Viator and TheFork. It’s also our belief that by presenting these three segments this way, we have made it possible for investors to truly do a sum of the parts valuation of Tripadvisor, something that was not straightforward to do with the old segments. We continue to look at other ways to highlight the value of these businesses in addition to segment reporting, as we have called in previous quarters. Although currently not yet demonstrating their profit potential as we invest in growth, we believe longer term both Viator and TheFork can reach EBITDA margins of 25% to 30% given their strong gross margin profiles, potential for scale, given their large TAMs and attractive unit economics. With that, I’ll hand it over to the operator for questions.

The first question comes from Naved Khan with Truist. Your line is now open.

Thank you. Just a couple of questions for me, on the – on Viator maybe, you can provide us some color on the repeat booking behavior that you’re seeing with the cohorts that you have acquired in the past one to two years. And maybe just on the branded ad campaign that you’re planning in the back half, how sizeable is it going to be and what are the markets or geographies that you’re looking to target? And then I had a follow up on the core hotel.

All right. Morning Naved. Viator, yes, very, very pleasing performance there indeed. We’ve seen tremendous growth in the business continue, and we’re very, very pleased with that. The growth – the demand push we’re making, the branded demand push, which is the second part of the question, is that we are diversifying away from purely relying on SCM online channels toward also doing some branded. It’s not very TV-based, although there might be a little bit of TV-based investment, but there’s going to be a lot of other online, more branded-oriented investment. I say that within the context of the guidance that we’ve given. So, we are reinvesting some of the overage that we’ve seen in the business. We’ve given some guidance for the third quarter of where we see profit come in, and those trends will be continuing into the fourth quarter. So within that envelope, you’ll see those investments happening. On the repeat economics with Viator, we have been able to measure quite precisely and quite consistently over its history how our cohorts behave, and that behavior has been ticking up consistently every year. We feel great confidence in the data that we’re getting. What we’re seeing is that increasingly we are able to trigger within the first 30 days repeat behavior, which is often just around the same trip, which is fantastic news, because that’s really the power of in-destination offerings. So, we have already sold something and either before the trip or during the trip, we sell or repeat transactions. But then in the first 12 months, we are successful in selling onward transactions as well. And then there is a lifetime value. There is year two, year three, year four repeats. Our investments that we’re making in marketing are investing beyond that first transaction for that reason. We have stretched that to 12 months before 18 months, in the past periods. So still attractive ROI from beyond 18 months perspective, but loss-making immediately, but the unit economics support that very clearly. So what you see in the, in 2021 and 2022 that these marketing investments have a negative impact on EBITDA in the year itself, but have a very important tailwind. And we’ve seen that tailwind really come through this year, in our repeat revenue and in our free revenue very, very clearly. We still attractively across all channels, so if I take the pay channels and the free channels, if we look at new consumers coming in across all those channels, we are immediately profitable. So although our pay channels may not be profitable immediately, we have a lot of new customers that we acquire also through our app, through our site directly, through SEO and so on, the blended basis, we are actually profitable immediately with new customers. So, these are powerful economics, they’re very attractive. We keep improving them, and the team has been successful in improving them. And it’s a main focus for us, and some of these brand investments are going to help with that.

Hey, Naved, it’s Matt. I thought I might just add one thing. As the Viator team has done a fabulous job reinforcing their market position and driving growth coming out of the pandemic. One of the things that I am really excited about is the way that they’ve shifted fixed cost into variable cost. I’m a big believer in the power and value of brands and have made many brand investments in a number of my past roles. I get excited about brands that have a loyal and passionate following that can pioneer their industry and really stand the test of time. In fact, that’s one of the reasons I was excited to join Tripadvisor. I would just say that the Viator brand has a real opportunity to drive market leadership and continue to scale. So being smart about how we make some of those investments and really thinking about the ROI of that investment is something that I’m excited that they’re doing.

Great. And the follow-up I had is on the Core hotel side. And for you, Matt, so, on things like Tripadvisor Plus, which maybe like a year ago looked pretty exciting. And then obviously you guys have been trying to iterate and improve that offering. Any thoughts on where, how you see the potential for these kinds of offerings? And just what do you see that can be done better and maybe just give us your take as you kind of look at it with a fresh set of eyes.

Thanks, Naved. I appreciate that. As I think many of, I’m a consumer first executive, I really want to make sure that everything we do puts the traveler and the experience seeker at the very center of everything we do. In that context, the direct-to-consumer offering that offers clear traveler needs with tangible benefits that consumers value is a compelling opportunity, particularly when you have an audience of this size. As I learn about all the various aspects of the business, I understand that this was launched as an experimental model and it’s still being tested. While the discounts in the offer are substantial and frequently cover the cost of the annual subscription, of course, there have been some challenges to scale. I recognize that the offering has not necessarily reached the milestones that might have been expected, but of course, I come from a subscription background in my time with Dow Jones and the Wall Street Journal. This is an area I plan to dive into, and I don’t want to get ahead of myself on a timeline. What I will say is that it’ll be a priority area of focus as we dive into strategy.

Thank you, Matt. Thank you, Ernst.

The next question comes from Richard Clarke with Bernstein. Your line is now open.

Good morning. Matt, nice to meet you. Welcome to the team. A couple of questions. If I may, maybe I can just start with some slightly high-level thoughts of yours about, I know you’ve only been there for a month, but do you think Tripadvisor needs dramatic changes? Does it need a change in strategy? Does it need new verticals to sell to its many customers or is this about execution? Do you believe the strategy is the right one, but it just needs to be executed on? Then maybe secondly, after a month in the business, what is your thought of the potential of Tripadvisor? Should we be looking at this as a business that’s going to be a high growth business going forward? I guess it wasn’t in a couple of years pre-COVID, but can it be longer term or would you see this more as a business that can be more cash generative? What do you think the focus of the performance is going to be? And I got a small follow-up, if I may after that as well.

Thank you, Richard. I appreciate the question. It’s one that I’ve given a lot of thought to. When I think about entering the company, the first thing is I feel really fortunate because I’m joining a company that has built a really strong foundation and offers many diverse assets to think about the growth path. There are opportunities, as there are in every company, to think transformatively. In some ways, the segment reporting that Ernst shared with you today is where I’m going to focus my time and energy because we have strong P&L leadership set up for Viator and TheFork, both growing, strengthening their market position, and the Tripadvisor Core business. We’ve seen the auction come back strong; media is doing well, and we have some opportunities in B2B. Over the coming months, I think we’ll really sharpen the strategy and align everyone in the company around it, putting an operating model in place, making choices about where we’ll prioritize. I do think execution is fundamental. We have a chance to execute more effectively than we have in the past. We’ve looked at where we can make some adjustments. We have high-performing teams. We’ve got a great culture. I think getting the right cadence and processes that get us collaborating cross-functionally and empowering teams to focus on where they have market insight and knowledge in their respective products and market will do a great job. I know that everybody would like to see me set a strategy today. It’s a little early to do that, but I think I can share a couple of areas of near-term focus. I mentioned putting the consumer at the center of all of our decisions. As we do that, we will reinforce the role that we play in the ecosystem, and really clearly define the problems that we’re in a position to uniquely solve. I think we can reimagine how we guide travelers before they go on a trip when they’re ready to make it happen, and when they’re in destination. If we get this right, I’m confident we’ll drive more direct traffic, app downloads, and we’ll see higher levels of engagement and monetization. I’m excited that we have a good number of diverse assets in the portfolio. The question there is, how do we think about how they fit together to deliver the most value? We can get all areas of the business serving the consumer in a seamless manner, and I think that will be noticeable and valuable. I’m excited about data. As I mentioned in my opening remarks, we have a data asset that can be an enabling platform for all areas of the enterprise and really a strategic lever to drive insight engagement. There are market opportunities that we can be thinking about to serve our existing business lines and have the potential to drive new ones. It’s also a currency where we can work even more effectively with partners in the ecosystem to drive unique solutions and value that we can be differentiated because it’s an asset that we have uniquely. We talked already about direct-to-consumer, which is clearly a compelling opportunity. When I look at it all together, it really comes down to a chance to reimagine our position, reinforce it, and do it from a position of strength.

Thanks very much, Matt. Maybe something a little bit more per se, but just on margin progression. Maybe this is one for you, Ernst, but it looks like your guidance is that margins will step back a little bit Q2 into Q3, and then step up again into Q4. That’s not the normal progression of margins that I would normally expect from Tripadvisor that tends to come down in Q4. So just want to do whether you can sort of help with why they go down and then back up again, what are the sort of drivers of that margin shift quarter-to-quarter?

From Q3 to Q4, we said in our shareholder letter that you should expect the seasonal step down that is typical for our Q4. So, you’re absolutely right. Typically, Q4 is a smaller quarter for us, and you would typically see a step down in EBITDA margin as a result because of our fixed costs. So that is the commentary there. You’ll see that the way we’ve guided for the third quarter is reasonably close to it. In Q2; we had an unusual benefit in Q2, which we called out. We got paid by the French government for a subsidy for the pandemic period of $11 million. That was an unusual and one-off benefit that we occurred in Q2. So if you had normalized for that, you’ll see that the margin development between Q2 and Q3, the way we guided is actually quite consistent.

Hey, thanks for taking my questions. I wanted to start by asking about strength in the U.S. dollar versus the euro and the pound. Based on your data that you’re collecting on cross-border travel behavior, I’m curious whether you saw this U.S. dollar strength help catapult more customer engagement to Tripadvisor, as U.S. travelers took advantage of their currency going a little bit further across some of the key destination markets across Europe, given that’s an important driver of traffic for Tripadvisor. And I’ve got a follow up.

Yes, it’s difficult to say that definitively, but it does make common sense and it has – in the past, we have seen that as an important driver. It is, there are multiple factors going on, including the price of flights, etc. So, you have to look at the total trip for a traveler from the USA to Europe. But we have seen in the past that, of course, if the euro is cheap, then it is more attractive to travel overseas and to travel to Europe. Nothing really I can give you as a strong data point at this point. But we have seen the growth of intercontinental travel come back progressively over the quarter. We have seen U.S. travelers booking hotels in Europe come back. We’ve seen very strong growth in U.S. travelers buying experiences in Europe, which is a strong indication of more people traveling to Europe. So, how much of that is pent-up demand and borders opening versus the euro impacting is a little bit difficult to draw a straight line to, but yes, we have seen very, very robust U.S. to Europe travel behavior.

Great. And Viator is obviously it’s been delivering very impressive revenue growth, but when you look at customer trends, sort of what portion in recent periods would you say are new to Viator versus repeat customers? How does this customer composition between new and repeat compare to pre-COVID? How does that kind of help inform your outlook for customer lifetime value and the ROI on your ramping marketing spend in that business?

So new customer growth has been very important for us, and you’ve seen us lean in on marketing in 2021 and in 2022. Fortunately, that means we are getting a lot of new customers in the door. But also fortunately we see the expected growth in repeat customer revenue as well. We see that as we anticipate it come, so you see both lines up going up into the right new customer revenue, as well as repeat revenue, which is of course very pleasing, and new revenue is an indication of repeat revenue in the following year. That’s been strong. The other thing I would call out is that pre-pandemic, our profile was predominantly Americans and Brits traveling to Europe. That was the big source of our revenue. Europe as a destination was the big revenue source. Of course, the pandemic shifted a lot of demand to North America domestic, people going to, and so what we’ve seen now in this year is that the North America to North America volume and growth has been like it was last year. Our customers continue to do that, plus now the U.S. and UK to Europe revenue has come back in full force. We’re adding that plus Europe to Europe revenue has come back. We’ve created a lot of new users. We’ve also created a new use case for our users, which is Viator is great to use when you say in the U.S. as well. Thank you all for joining us this summertime Friday morning. We have a lot of opportunities ahead of us, and a lot of exciting work to do. I’m looking forward to this next phase and keeping it open with all of you. Have a great weekend, everyone.

This concludes today’s conference call. Thank you for participating. You may now disconnect.