Tripadvisor, Inc. (NASDAQ:TRIP) Q1 2023 Earnings Call Transcript

Tripadvisor, Inc. (NASDAQ:TRIP) Q1 2023 Earnings Call Transcript May 4, 2023

Operator: Good day. And thank you for standing by. Welcome to the Tripadvisor First Quarter 2023 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. Please go ahead.

Angela White: Thank you, Alissa. Good morning, everyone. And welcome to Tripadvisor’s first quarter 2023 financial results call. Joining me today are Matt Goldberg, President and CEO; and Mike Noonan, CFO. Last night, after market close, we filed and made available our earnings release. In that release, you’ll find reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures discussed on the call. Also on our release, 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’s view as of today, May 4, 2023.

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.

Matt Goldberg: Thanks Angela. And thanks to all of you for joining us this morning. Since I first joined these quarterly calls last July, I have been focused on aligning our teams around a shared vision, reinvigorating our culture of execution, organizing ourselves to break down silos, building out a world class leadership team. Leveraging data to deepen our consumer engagement focus, accelerating our product development and investing to extend our market leadership and experiences. We are pleased with the progress we’re making while delivering on our expectations for our financial performance. Our Q1 results were achieved as our new leadership team rallied the organization around our group vision to be the world’s most trusted source for travel and experiences.

We launched our strategy for Tripadvisor and engaged our employees on how we translate our priorities into an operating plan with tangible proof points while delivering on our revenue and margin plan. And we continued to deliver meaningful growth as the market leader in experiences at Viator and strengthened our European dining position at TheFork. We delivered year-over-year revenue growth of 42%, or $371 million and adjusted EBITDA of $33 million, or 9% of revenue in line with our expectations for the quarter and reaffirming our confidence in our plan for the full year. In a moment, I’ll provide some tangible examples of our disciplined execution and the progress we’re making against our segment strategies. But first, let me frame these results in the context of our strategy and illustrate how our focus is driving performance.

We operate unique segments with their own strategies, each in different stages of growth, with different competitive dynamics, market opportunities and customer value propositions. In Tripadvisor Core, we’re focused on delivering sustainable revenue and profit growth, by driving deeper traveler engagement that benefits our partners and fuels our diverse monetization paths. In Viator, we continue to accelerate our leadership position in experiences by investing in awareness, enhanced products and repeat bookings to capture more market share in this underpenetrated and high growth travel category. In TheFork, we’re driving healthy growth with significant margin improvement this year by delivering value to both diners and restaurants in the European dining market.

Starting with Tripadvisor Core, Q1 revenue was $244 million reflecting 28% year-over-year growth driven by our experiences in hotel offerings. On our last call, we set out our strategy for Tripadvisor Core outlining three areas of focus that we will continue to reference as we deliver our plan. Let’s revisit these stated priorities. First, we will innovate around world class guidance products through more dynamic and diverse content formats, innovative Trip planning tools, and a mobile- first approach. Second, we will prioritize deeper engagement with travelers, meeting their decision making needs in a more personalized way, powered by data and technology while evolving our membership program over the long term to drive loyalty. And third, we believe that we can transform that engagement into more value for our partners.

Today, we monetize only a fraction of our audience, largely through our Hotel meta offering. As we build a more engaged audience, we believe we can drive stronger overall monetization by further diversifying our business through our media and experiences offerings. This is a long term strategy and we’re in the early days, but I’m pleased to report that we’re on track in executing our roadmap for the year. Though progress will build over time, we’re beginning to see important green shoots. Let me highlight a few examples. This past quarter, we rolled out some early enhancements to our user experience across the platform, most notably in how users navigate the home screen in our app, shop for experiences in hotels and submit reviews. While this is just a starting point, we’re excited about the early indicators, including increases in shopper click through rates, decreases in bounce rates, and double digit improvements on review completion and photo submissions, all fundamental areas for our strategy going forward.

Importantly, in some of our tests, we saw incremental lifts in our gross booking value and revenue for experiences, one of our critical growth opportunities. We began piloting our new content approach in select destinations, developing fresh guidance across multiple formats like articles, itineraries and collections. For example, in certain cities, a traveler can now discover the best places to stay, things to do, and where to eat by engaging with content that blends the voices and perspectives of real travelers with expert curation all powered by technology and our proprietary data. And as we suspected, we’re finding that better content drives deeper engagement. Preliminary results show an increase in time spent on platform and page views.

We made significant progress scaling our unified groupwide customer data platform, which now has over a billion data profiles. This is the foundation that will power our ability to display personalized search results, more effectively target customers and prospects, and build better audiences for advertising partners, among other use cases. We continue to drive changes within our organization to improve execution, including an aligned functional leadership structure with world class talent in new roles driving product sales and marketing and operations. We’re already seeing the impact of our new operating model, which is driving increased velocity and product development, more flexibility to shift resources to align with our highest priorities, and streamlining our teams to generate a higher level of performance going forward.

These examples are reflective of a more consumer and product led mindset that we will continue to build on quarter by quarter. I’m particularly excited about the work we’re currently progressing at the intersection of trip planning and generative AI. What sets us apart in the industry is our relationship of trust with travelers. We understand that travel decisions are complex and good advice is hard to find, and we believe that we’re uniquely positioned to bring together our large asset of proprietary first party data and authentic content with best-in-class large language models and embed them in the tools travelers need to fully plan itineraries end to end. We have distinct assets and capabilities, our brand trust, broad reach, signals of intent, quality reviews from real travelers sharing their actual experiences, and more, all of which we can leverage to reinforce our relevance in the travel ecosystem.

Turning now to Viator, where we are accelerating our leadership position in the experiences category. We grew revenue year-over-year by 105% to $115 million, and reached over $800 million in gross bookings value. The strong revenue growth rate was driven by volume and better take rates, and we continue to see improvements in repeat rates of our customer cohorts. The market for experiences is large and growing, anticipated to reach just under $280 billion in gross bookings value by 2025, and a market that is still largely offline with only about a quarter of gross bookings transacted online today, but has continued to migrate online at a fast rate. Beyond these category tailwinds, we’re investing in marketing to acquire new customers, to build our brand, and to drive awareness to the experiences category.

We expect that over time, as our marketing efforts and expansion into other channels gain traction, we can drive strong unit economics. Our teams are focused on improving the UX, the app experience, product and technology and marketing programs for our suppliers. As a result, we’re seeing ongoing improvement in conversion, take rate and app adoption. We’re frequently asked about the advantage of having two brands in the market in the experiences category and what role each one plays. I’d like to share a few thoughts on this topic. Our experiences brands are complementary, allowing us to capture a broad travel audience across all the things to do on a trip, as well as going deep in experiences. At Viator, the world’s leading experiences OTA, we provide travelers who are looking to book their next experience with an unparalleled collection of global tours, activities and experiences.

For our 50,000 plus operators, we offer distribution on thousands of sites, reaching millions of travelers, including direct access to Tripadvisor’s storefront. At Tripadvisor as the largest travel guidance platform, our trusted brand and reviews help build awareness and guide travelers to the right experience as part of their overall travel planning. It serves travelers higher up in the funnel, enabling us to reach audiences that Viator traditionally doesn’t, introducing experiences as one component of an overall trip. Almost as many travelers come to us for experiences as for hotels or restaurants, and we have a significant opportunity to expose even more of them to bookable inventory. And the majority of those travelers come to Tripadvisor via free traffic, given the vast reach of the brand, which is an exceptional asset to help us drive our unit economics over time.

We believe that our combined approach leveraging Viator and Tripadvisor for their distinct but complementary strengths and their large tams is a competitive advantage as we focus on creating the best user journey that matches growing traveler demand for experiences with the most relevant supply. Finally, at TheFork, we saw solid performance, reinforcing our position as a leader in the European dining sector. Revenue grew 35% year-over-year and 41% in constant currency driven by strong booking volumes. We’re even more pleased at this activity when considering the less than ideal backdrop in Europe with the macroenvironment and other disruptions such as the recent strikes in France. As we balance growth with profitability adjusted EBITDA margin improved year-over-year.

We’re continuing to drive value to both restaurants and diners. On the restaurant side, we saw improved productivity and discipline across our sales teams that we believe will help us grow from our current base of over 55,000 restaurants. We’re also delivering analytics that demonstrate a clear return on investment for restaurant owners, which helps drive restaurant acquisition and retention. On the diner side, we’re seeing higher share of new customer acquisition through our app versus the web and app download volumes that are nearly double 2022 levels. We know that diners who come to us through the app have a higher lifetime value and much better retention, giving us confidence in the value we’re driving for customers. Over the last year, we’ve observed consumers prioritizing their discretionary spend in travel and experiences over other categories despite the macro uncertainty.

As we prepare for the upcoming peak travel season, we continue to see positive signals of intent in our own data that we find encouraging. While travelers are just starting to kick off the peak planning period for summer holidays, summer travel intent is already significantly higher than last year at this time by advanced planners. Our data also suggests that share of international travel intent is returning to pre-pandemic levels in the US and EMEA and APAC intent to travel is more than double than last summer. We’re also observing an increase in experiences searches year-over-year, particularly in Europe. Of course, there remains ongoing uncertainty about the macroenvironment. Regardless, we’re focused on the things we can control, executing on our strategy, and delivering on our plan for each of our segments.

As I close out my remarks, I want to thank our teams for their growing engagement levels and energy for the work we’re fortunate to do together every day. As I travel across our offices to discuss our strategic priorities and execution plans, I continue to be impressed with our team’s curiosity, action orientation and passion for our purpose, all grounded in the relationships we build with travelers as they navigate their travel decisions and connect to our partners. We are confident in our progress and look forward to keeping you updated in the coming quarters. With that, I’ll turn the call over to Mike.

Mike Noonan: Thanks Matt, and good morning, everyone. I will review the results of the first quarter, including segment commentary, and provide some color on the trends we are seeing in the second quarter. All growth rates for 2023 are relative to the comparable period in 2022 unless otherwise indicated. Now on to Q1, we delivered results that were in line with our expectations. Consolidated revenue was $371 million reflecting a 42% growth rate, or 46% on a constant currency basis, and adjusted EBITDA was $33 million, or 22% growth rate, and represented a margin of 9%. Our results reflect a healthy travel environment, particularly in the experiences category where we continue to lean into a very large market opportunity. Turning to the segment performance for the first quarter Tripadvisor Core delivered a strong quarter with revenue of $244 million which represented 28% growth.

Branded hotels grew 24% with solid execution in both Hotel meta and our B2B offerings. In Hotel meta, the quarter was helped by an easier year-over-year comparison in January and to a lesser extent in February due to omicron. While March grew at a more normalized level. Hotel meta performance was consistent across regions, with some higher growth in APAC given the broader opening of travel in the region. We saw particularly strong performance in experiences and dining, which grew 65% in the quarter. This was due to growth in our experiences revenue, which was up over 100% in Q1, primarily driven by marketing investment as well as improvements to conversion rates. These improvements were largely related to better presentation and matching of experienced recommendations to our customers.

Display and platform grew 15%, which was impacted slightly by the timing of several new media deals as backlog in the quarter remained strong. Our other revenue grew 30%, driven by growth in our cruise offerings, which has seen strong performance as the cruise industry continues its recovery. Adjusted EBITDA in Tripadvisor Core was $72 million, or 30% of revenue, just above 29% of revenue in the same period a year ago. The slight margin improvement was driven by fixed cost leverage despite sustained performance marketing spend to drive experiences growth. At viator revenue was $115 million, reflecting growth of 105% or 115% on a constant currency basis. Gross Booking Value, or GBV was over $800 million and exceeded expectations. Revenue growth was high than GBV growth, primarily due to increased take rates year-over-year.

The increase in take rates is due to greater adoption of our programs that allow suppliers to advertise more effectively on our platform and to a lesser extent, an increase in mix shift towards non-US destinations. Additionally, this quarter we saw a step up in average book windows compared to both last year and Q1 of 2019, which we believe is reflective of a continued healthy travel market. Adjusted EBITDA loss for the Viator segment was $30 million, which represents year-over-year margin improvement primarily driven by leverage and people cost. Sales and marketing expenses as a percent of revenue increased year-over-year, primarily due to the start of our brand campaigns in the second half of 2022 and will continue in 2023. We saw leverage in performance marketing costs as we continued to diversify our acquisition channels outside of traditional stem.

As a reminder, total sales and marketing expenses incurred in period generally benefit recognized revenue in future periods. We like the returns and unit economics improvements we are seeing and are leaning into the large experiences opportunity through sales and marketing investments to drive new and repeat customer bookings that can further accelerate share gains in this attractive market. We are encouraged by recent cohort performance and believe our investments will create a large repeat customer base over time that can ultimately drive very profitable business for us at scale. Our repeat customers who book at a higher average item value than new customers often return to us through free channels at higher rates than our new customers are, and are therefore more profitable.

As repeat customer bookings become a greater share of our total bookings, we expect to drive more and more leverage. Further, we believe that as we build brand and awareness and drive more direct and new and repeat customer bookings, customer unit economics will continue to improve. In the near term, we are investing to build a large customer base, deliver more value to our suppliers and improve our product. At TheFork, revenue in Q1 was $35 million, reflecting year-over-year growth of 35% and 41% on a constant currency basis. Performance was driven by year-over-year bookings growth of approximately 24% and healthy growth in revenue per booking. We were pleased with this performance considering the disruption in France from the recent strikes and other macro volatility in Europe.

Adjusted EBITDA loss for TheFork was $9 million, which represents improved margins year-over-year and was primarily driven by leverage in people costs and to a lesser extent a onetime cost benefit in cost of revenue. This leverage was partially offset by the timing of planned brand investments between Q1 and Q2 this year versus last year. Turning now to consolidated expenses. Cost of revenue levered by about 60 basis points due to greater headcount absorption in our Viator brand. Sales and marketing expenses de-levered by about 525 basis points, primarily due to increase in Viator marketing spend, including brand which more than offset leverage in people cost. Technology and content and general administrative expenses levered by approximately 450 basis points, primarily driven by people costs.

Consolidated adjusted EBITDA in Q1 was $33 million, or 9% of revenue, compared to 10% of revenue for Q1 of last year. Now on to our cash and liquidity position. Free cash flow for the quarter was $119 million which is up meaningfully versus $72 million in Q1 of 2022. This year-over-year improvement was primarily due to an increase in cash received in advance from customers for experienced bookings within deferred revenue and deferred merchant payables. We ended the quarter with a strong balance sheet with just over $1.1 billion in cash. Moving to recent trends and thoughts for second quarter. As a reminder, Q2 is a tougher year-over-year comparable period as last year we witnessed a surge of travel demand as we emerged from the impact of Omicron in Q1.

As such, we are expecting growth rates to moderate through the second quarter of this year Tripadvisor Core revenue saw low single digit growth in April, which we expect to closely mirror growth for the quarter. For Viator revenue, April growth rate was over 60%, which we expect to step down meaningfully through the quarter as we move into a difficult compare versus last year. For TheFork revenue, we saw a little over 20% growth rate in April, and we expect this to be fairly consistent through the quarter. For Q2, consolidated adjusted EBITDA margin, we’re expecting to see a sequential seasonal improvement in margin, but about a six to eight point step down year-over-year. Contributing to the margin headwind is approximately three percentage points due to a COVID subsidy benefit of approximately $11 million in TheFork and a onetime non-income related tax benefit of approximately $2 million in Tripadvisor Core, both recorded in Q2 of 2022, with the remaining impact of approximately three to four percentage points due to primarily the investments in Viator growth in marketing and brand spend.

For Q2, adjusted EBITDA margin at Tripadvisor Core, we’re expecting to see a sequential seasonal improvement, but about a six to seven point step down in margin year-over-year. This is largely due to a difficult compare and was anticipated in our margin expectation for the full year. A little over half of the margin step down is due to the impact of phasing of hiring last year as headcount increases were weighted to the back half of the year. This was magnified by a stronger sequential increase in revenue from Q1 to Q2 in 2022 as we emerge from Omicron versus this year’s expected sequential pickup in revenue. The remaining margin pressure is due to increased investment in performance marketing to drive experiences growth as well as the aforementioned cost benefit in Q2 of last year.

We are reaffirming our expectation for the full year of 2023 adjusted EBITDA margins for both consolidated and Tripadvisor Core to remain approximately flat with 2022 margins. Our outlook remains consistent with expectations a few months ago. To conclude, we believe Q1 was a solid quarter and we are on track to deliver expectations for the year as we continue to manage the business that reflects our segment strategies. With that, I’ll pass the call back over to the operator for Q&A.

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Q&A Session

Operator: The first question comes from Lloyd Walmsley from UBS.

Lloyd Walmsley: Thanks. I have kind of, I guess, a two part question on generative AI. And I guess the first part is just like, it seems like a huge hurdle territory to reinvent travel planning. You guys seem like you have a lot of good assets to put to work here. So anything more you can share on? Just like how you’re thinking about creating new product experiences using that, and like how big of a team do you have focused on this? And the second part is just kind of on the more defensive side. It also seems like something that could open the door for new applications from other people. So what steps are you guys taking to protect your content from getting crawled and used by other players? Like what are you doing? What can you do? Anything you guys can share there would be great. Thanks.

Matt Goldberg: Thanks Lloyd. Appreciate the question. And of course, generative AI is such a hot topic, as we all know, and we’ve been focusing on it since day one. Generative AI and the advances in large language models, it’s such a meaningful advance in technology, and we think it’s going to have a significant impact in all areas of society. And so there’s a lot of use cases out there. Things are moving really rapidly. I think there’s a lot of questions to answer. And I think our primary point of view is that the companies with well established brands, large assets of data communities that trust them, are really well positioned to utilize generative AI to capitalize on that position. And we intend to do that. So we have a long history with AI and we have a substantial team working on this.

We made the decision that we weren’t going to go chase the early headlines. We wanted instead to work on something that would really leverage what’s unique about us. What capabilities do we have and how can we deeply integrate it into our product strategy for the long term? As you know, we developed a strategy where generative AI actually creates an incredible opportunity for us to differentiate. People come to us for guidance, and we think that the technology can help us supercharge that. And of course, we can deliver that in context. And so as we unlock the value, we’re thinking about how does the technology integrate into our UX? How do we embed it into the product experience and drive engagement? We think it can be accelerant to be an accelerant, and ultimately, we want it to be in the tools that travelers use to fully plan their itineraries end to end.

I mentioned the importance of our relationship of trust. There’s certainly a lot of people experimenting with generative AI. I think those who can deliver results that are meaningful and reliable and do that at scale are going to be in a good position. And we just think that the baseline of the, I mentioned the billion data profiles. That is a great start for us to do it. But as with any technology, there’s a lot of iteration. There are going to be areas of opportunity beyond product. And I think about productivity improvements. I think about certainly we can accelerate how fast we move, it’s super early. We’re going to iterate and learn. And I think that when we think about our content, we have choices about who gets to crawl and index our content and under what terms.

And so we’ll always be thinking about how to take the content that we have that’s valuable and make sure that we are rewarded for it in the right ways. So, again, we recognize both the opportunity and the questions that need to be answered. And we’re going to be saying more about this quarter by quarter.

Operator: Our next question comes from the line of James Lee from Mizuho.

James Lee: Great. Thanks for taking my questions, two, here. Can you guys talk about maybe ADR trends by geography? What are you seeing in terms of hotel pricing in the major region you’re operating? And also second thing Viator, sounds like you guys are making good traction on advertising. How should we think about the opportunity of that business advertising in terms of takeaway over the longer term? Thank you.

Mike Noonan: James. I didn’t catch that second part of the question. What was that?

James Lee: Second part is the advertising takeaway for Viator. How should we think about that for long term of the business? Thanks.

Mike Noonan: Got it. Okay. Yes, I’ll take the first part on ADR. So, really, I guess the question is kind of what are we seeing in our primary hotel auction and B2B business? I’d say Q1, we certainly saw very healthy volumes and pricing, and that was largely on a year-over-year basis, a lot driven by the easy compare. And we did see those step down right as we move through the quarter. We have seen a period of pricing has been pretty stable. As we move through Q2, we are expecting volumes to come down, right, as we move through that tougher compare with pricing, to be a bit more modestly up on a year-over-year basis. So what we’re seeing in the hotel business is expected behavior on a year-over-year basis as we see as we move into our tough compare period and pretty much aligned with our expectations on that part. And then the second question.