Tripadvisor, Inc. (NASDAQ:TRIP) Q3 2023 Earnings Call Transcript

Tripadvisor, Inc. (NASDAQ:TRIP) Q3 2023 Earnings Call Transcript November 7, 2023

Operator: Good day and thank you for standing by. Welcome to the Tripadvisor Third 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. [Operator Instructions]. 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, VP of Investor Relations. Angela, please go ahead.

Angela White: Thank you, Felicia. Good morning, everyone and welcome to Tripadvisor’s third quarter 2023 financial results call. Joining me today are Matt Goldberg, President and CEO; and Mike Noonan, CFO. Last night, after the market closed, 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 this call. 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, November 7, 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 good morning to everyone joining us today. For the third quarter on a consolidated basis, Tripadvisor Group delivered revenue of 533 million reflecting growth of 16% year-over-year. Viator achieved another solid quarter of outperformance with 41% revenue growth versus last year, and Tripadvisor Core also performed better than expected. Across both Viator and Tripadvisor Core, the progress in our experiences offering continues to exceed our expectations reflecting the large opportunity still in front of us in this category. TheFork made meaningful margin improvement on healthy top line growth, nearly reaching breakeven for the quarter. Consolidated adjusted EBITDA was a 127 million or 24% of revenue.

These results reflect our continued progress in executing our segment strategies with strong financial and operational discipline. As a reminder, at Tripadvisor Core we’re focusing on engagement and delivering world class guidance products to fuel our diverse monetization paths. At Viator we are reaching our leadership — we are reinforcing our leadership position in experiences by investing in awareness, enhanced products, and repeat bookings to capture more market share. At TheFork we’re driving revenue growth with significant margin improvement this year by delivering value to both diners and restaurants as the leader in the European dining market. I’m pleased with what our teams have accomplished in the quarter. We’re leaning into the strength of our existing assets while ensuring that we build and innovate for the future.

We’re executing more efficiently and effectively across each of our segments, and we continue to solidify our position as the most trusted source for travel and experiences with Tripadvisor leading the way on the launch of the Coalition of Trusted Reviews, where we’ve brought together the leading platforms in the online review space to combat fake reviews and set global standards to best serve consumers. Let’s get into each segment starting with Tripadvisor Core, where we continue to make steady quarter-by-quarter progress on our strategy. I’m going to highlight a few examples of the proof points we’re seeing and our ability to provide world class travel guidance, use that guidance to drive deeper engagement with travelers and position ourselves to translate that engagement over time into meaningful financial impact.

Our strategy starts with innovating and enhancing our product, reinforcing Tripadvisor as a world class guidance platform for planning and taking a trip as well as in destination decision making. At our last call, we mentioned the promising early feedback from a significant upgrade to trips our core trip planning and itinerary product including a new generative AI powered itinerary feature. We’re still early in the journey and are iterating continuously, but we’re seeing compelling results. During the first three months in beta, members who created itineraries returned at a much higher rate within the first seven days than members who hadn’t created an itinerary and we’ve observed that higher return rate continuing for the full month thereafter as well.

Importantly, members who build an itinerary also generate on average three times higher revenue than the average Tripadvisor member and the average member already monetizes at approximately 10 times the rate of non-members. We believe the initial data is a good indication of early product market fit and we’re on a plan to launch this full trip planning and itinerary product on our mobile app, on iOS and Android this quarter. Another stated priority is to drive deeper engagement with travelers leveraging our unique content and data at scale. We continue to deliver progress in Q3, let me share two examples. First, we’ve been leveraging generative AI and machine learning tools to bring together guidance from our community and our editorial team on a set of our most popular destination pages, think New York City, Paris, and so on.

Curating fresh, relevant content on these pages is driving over 15% more saves so travelers are engaging more frequently by adding a desired hotel, restaurant, or experience they discovered through our product to the trip they’re planning. Second, we recently rolled out a test across tens of thousands of hotels that uses Gen AI to summarize reviews and deliver clear insights to travelers on key quality attributes as they consider their choices. Let me give an example, for me the single most important factor in booking a hotel is that I can get a quiet night sleep. We’re now leveraging our data to provide a clear signal about the noise level of a particular hotel, along with other critical qualities we know are important to travelers like atmosphere, service, value, and more.

Well Gen AI provides the perfect way to summarize content at scale, trust is still at the center of why people come to us, so in this feature we share the specific underlying reviews from our community of travelers that were used to generate each insight and provide a direct path to go deeper on what matters most to the traveler. These examples are just a few of the many encouraging proof points that our teams are driving, which gives us conviction in our strategic direction, prioritization, and sequencing. But we know this only matters if it translates the financial impact over time, and we’re also pleased with the leading indicators we’re getting on monetization. I mentioned before the significantly higher revenue we see among users who create a trip.

As these users build an itinerary and engage more deeply they’re exposed to monetizable hotel and experience recommendations to relevant ads from our partners, all of which were increasingly integrating directly into this user journey. And the refreshed content on our destination pages is a perfect point in the journey to surface these options to a traveler. We’ve already observed double-digit increases in experiences revenue on the pages with these content enhancements and we are just beginning to scale. All this adds up to more engaged travelers exposed to monetizable products; in experiences, for example, we’ve already exposed over 30 million more shoppers to bookable products year-to-date than in 2022. Given our positioning in the traveler journey, and our scale, we see opportunities to expand bookable supply into other categories or geographies, driving value for travelers and partners alike.

Turning to Viator, our position as the global leader in experiences continues to strengthen. We’re serving more travelers, partnering with more operators, and powering more experiences storefronts than ever before. We reached $1.1 billion in gross bookings value this quarter. In an attractive category with a total addressable market projected to reach nearly $300 billion in GBV in the next few years, online players like us are set to disproportionately benefit as bookings increase and migrate online. We’re working hard to accelerate this migration, differentiate Viator, and drive sustainable results. On the traveler side, our acquisition engine is gaining efficiency. Our brand marketing investments are yielding greater demand from more profitable channels, such as brand search, app, and direct traffic.

And we’re successfully turning this new audience into a loyal one. We’re doing this in two ways: first by improving the product experience, by easing search, enhancing the app, and improving our check-out experience, and in hundreds of other large and small ways. Second, we’re making it simple and sensible to come back by providing programs and incentives that drive loyalty. Collectively, these are driving significant improvements to repeat behavior. Our most loyal users are our fastest growing, highest spending, and least expensive of all our users. On top of this compelling traveler experience, we’re also reinforcing our supply asset. Viator has the world’s largest, high quality, online supply of experiences: over 300,000 products from more than 55,000 operators.

We’ve achieved this by being the best partner we can by driving more bookings, and delivering demand as seamlessly as possible. Our success here shows up in our high retention rates as well as our operator engagement, with suppliers generating meaningfully more business through Viator the longer they remain on our platform. We also see it in the adoption of our Accelerate program: more than half of eligible products are now opted into the program, with operators choosing to exchange a higher commission for increased exposure across our platform. This has contributed to sustained improvements in take rates, and a clear signal of the meaningful value we are providing. Finally, at TheFork, we continued to make progress on executing our strategy to achieve profitable growth, growing top line revenue while reaching an adjusted EBITDA loss of $1 million, a significant improvement over last year.

As we build on this performance, we remain on track to deliver on our commitment to exit the year at break-even profitability. We are achieving these results by leveraging our historical investments on both sides of the marketplace, while focusing on operational execution. On the demand side, we observed strong bookings contribution from repeat diners, the majority of which engage with us through our app, our most efficient and profitable channel. On the supply side, our restaurant cohort performance exhibited sequential improvements on both volume and value per restaurant. We’re also benefiting from operational efficiencies, as we lead our teams to higher levels of productivity as the business continues to grow. Before I pass the call to Mike, I want to reiterate how excited we are about the work we are doing and how proud I am of our team and their focus entering the final stretch of the year.

As we look externally, we can’t predict how the global economy or geopolitical events may impact the strong activity in travel we’ve seen for the last year plus. It’s normal for us to see immediate movement in destination intent and experience bookings when disruptions occur, which typically abate in the days or weeks following, whether related to extreme weather, natural disasters, or recently, the activity in the Middle East. Overall, however, we continue to see resilient and durable travel intent in our data, driven by the enduring trend of consumers prioritizing travel and experiences over other discretionary spend. What we do know is that across the Group we are making tangible progress. At Tripadvisor Core we are on track in a multi-year transformation journey, leaning into a future that diversifies our business to deliver new avenues for sustainable growth and profitability, as exemplified by our thriving experiences marketplace.

At Viator, we are scaling to lead the global experiences category, delivering healthy levels of growth with improving unit economics, which gives us confidence in our ability to realize increased profitability at scale from the strategic investments we’ve made. And at TheFork, we are executing in a fragmented market with a compelling value proposition and competitive differentiation; we will continue to leverage historical investments as we progress this segment to profitable growth in the near-term. With that, I’ll turn the call over to Mike.

Mike Noonan: Thanks Matt, and good morning everyone. I’ll start by reviewing Q3 results and provide some color on expectations for Q4 as well as some preliminary thoughts on fiscal 2024. All growth rates for 2023 are relative to the comparable period in 2022, unless otherwise indicated. Now onto Q3, we delivered results that exceeded our expectations for the quarter. Consolidated revenue was $533 million, reflecting growth of 16%, or 13% on a constant currency basis. Adjusted EBITDA of $127 million, or 24% of revenue, was approximately 150 basis points better than the range we provided last quarter. Turning to the segment performance for the third quarter, Tripadvisor Core delivered revenue of $290 million, which represented 2% growth for the quarter.

Branded Hotels revenue of $181 million declined 4%, an improvement from last quarter’s decline of 7%. Within Branded Hotels, we saw mid-single digit declines in hotel meta and high-single digit growth in our hotel B2B business. We were pleased with the stability of hotel meta in Q3, in particular coming out of the volatility we observed in Q2. Healthier trends emerged in July and carried forward through the rest of the quarter. The performance in the quarter, as compared to our outlook, was largely driven by sustained pricing strength, with volume broadly in-line with our expectations across both free and paid channels. Geographically, Europe performed better than our expectations–though on a year-over-year basis, it still lags the U.S. which continues to benefit from sustained pricing strength.

We continued to see strong pricing growth globally while volumes lag last year’s levels. While pricing is heavily impacted by the overall health of the travel market, we believe the pricing trends we have witnessed this year are also a direct result of product decisions that we have made on the platform. Some of the changes that we implemented have reduced volume but delivered higher quality clicks for our partners, which we believe has contributed to the strong pricing trend this year. We were pleased with the performance of our free channels within hotel meta, as the share of hotel meta revenue coming from free channels remained stable year-over-year. We continue to manage paid channels for profitability by maintaining consistent ROAS targets.

While this puts pressure on hotel meta revenue growth, we believe maintaining profitability in paid channels is prudent as we continue to execute on our transformation at Tripadvisor Core. Display and platform revenue grew 15% to $38 million. We’re proud of the growth we were able to drive amidst a more modest growth in the broader travel media category, in particular traditional display advertising. This performance is due in part to the collaboration in creative and content we are doing with endemic and non-endemic partners. Experiences and dining revenue grew 22% to $55 million, with experiences revenue growing nearly 30%. We are very pleased with this performance, in particular with how the teams have managed to continuously improve conversion rates across channels and surfaces while more effectively managing profitability in the paid channels.

Revenue from Other offerings declined 11% to $16 million due to continued de-emphasis of flights, car rental, and vacation rental categories, which offset revenue growth in cruise of 13%. Tripadvisor Core adjusted EBITDA was $111 million, or 38% of revenue, above our expectations and approximately 100 basis points lower than the same period a year ago. The modest de-leverage was a result of a revenue mix shift between hotel meta and experiences. Although hotel meta’s revenue is a smaller share of total segment revenue, its contribution margin has remained stable year-over-year. Turning to Viator, revenue was $245 million, reflecting growth of 41% or 39% on a constant currency basis, which was meaningfully higher than our expectations. Gross booking value was approximately $1.1 billion, reflecting growth of approximately 33%.

Growth in gross booking value was primarily driven by volume growth and to a lesser extent pricing. We observed strong growth in destination bookings outside of the U.S. Adjusted EBITDA at Viator was $17 million, or 7% of revenue, which is flat year-over-year. While we achieved leverage in performance marketing this quarter, it was offset by an increase in brand spend. I want to reiterate what Matt said earlier about how Viator continues to deliver an enhanced value proposition to both travelers and operators. It’s a large opportunity and our strategy is focused on investing to build scale and a strong competitive position in the experiences category. Our investment in traveler acquisition continues to translate to attractive and improving repeat behavior that is now delivering meaningful financial impact that we see carrying over to deliver full-year profitability in 2024.

As we’ve discussed, the online addressable market for experiences still has low awareness. Just 25% of the nearly $250 billion market transacts online today but continues to migrate quickly. Given these dynamics, new travelers typically discover Viator through paid online acquisition channels, such as search engine marketing. Given the value of scale and the reach these channels offer, we have been investing significantly to acquire new customer cohorts that are new not only to Viator, but often new to the category itself. Underpinning this investment strategy is our success in capturing new demand at scale through all acquisition channels and delighting these customers for the first time. And this success is driving attractive, growing repeat behavior that we are now seeing drive leverage as Viator continues to scale.

Our traveler cohort performance has consistently improved across every major metric. Higher rates of repeat bookers who are spending more with us and every subsequent booking returning to us through our most profitable channels: whether it be directly on our site or app, or through SEO, branded affiliates, or branded search. The combination of this consistent behavior has resulted in a highly valuable base of loyal, repeat travelers. Gross bookings value from the repeat customer base has been our fastest growing segment at Viator, where we observed 3.5 times growth relative to new customers this quarter. As we continue to deliver on our value proposition, we expect Viator’s traveler cohort mix to continue to shift disproportionately more towards a higher contribution of repeat travelers that engage with Viator more and more directly or through immediately profitable acquisition channels.

So we continue to be encouraged by the strength of Viator’s unit economics and the leverage they are driving in the second half of this year that we believe will underpin full-year profitability next year. At TheFork, revenue in Q3 was $42 million, reflecting growth of 20%, and 14% on a constant currency basis. Revenue growth was driven by a mix of both volume and pricing growth. Overall, we are focused on continuing to increase monetization of our marketplace with balanced investments in both supply and demand in order to exit the year at adjusted EBITDA break-even. Adjusted EBITDA loss at TheFork was $1 million, or negative 2% of revenue. Sales and marketing as well as technology and content costs levered significantly, resulting in 24 percentage points of year-over-year margin improvement driven by disciplined operating execution.

We are pleased with the progress we are making on profitability and anticipate further momentum in future periods. Turning now to consolidated expenses. Cost of revenue de-levered by approximately 100 basis points primarily due to the increased weighting of Viator-related cost as a percent of consolidated revenue. Viator’s costs include credit card processing fees, which increased with Viator’s transaction volume. We also saw some increases in media-related costs in the Tripadvisor Core segment due to more customized campaigns we ran in the quarter. Sales and marketing as a percent of revenue was approximately flat year-over-year. People costs as a percent of revenue were lower at Tripadvisor Core and TheFork, offset by higher sales and marketing spend at Viator, primarily due to increased brand spend.

Technology and content de-levered modestly due to higher people costs at both Viator and Tripadvisor Core, which offset lower costs at TheFork. G&A expenses levered by about 50 basis points primarily due to lower people costs at Tripadvisor Core. During the quarter, we had a restructuring expenses of approximately $18 million. This included $8 million in Tripadvisor Core related to the cost savings actions we discussed on our last call. In Viator, this included $3 million related to restructuring efforts to move certain functions to lower cost locations. Finally, at TheFork, this included $7 million related to cost savings initiatives actioned during the quarter. As we noted on the last call, the actions impacting Tripadvisor Core are expected to result in $35 million annualized cost savings.

We now also expect the actions we took at TheFork to drive approximately $10 million in annualized savings. Timing of the actions we took across the businesses were largely isolated to the third quarter, but expect some small incremental restructuring expense to carry over in the coming quarters based on execution timing. Now on to our cash and liquidity position. Free cash flow in the quarter was a deficit of $2 million. The sequential movement was driven in part by the seasonal outflow in deferred merchant payables during the peak travel season. During the quarter, we received a tax refund of $49 million associated with a previously disclosed IRS audit settlement. As a reminder, this refund was partially offset by the settlement payment of $113 million made during the second quarter of 2023.

The expected net cash outflow related to this settlement is approximately $60 million to $65 million. Year-over-year the decline in operating cash flow was due largely to timing of deferred merchant payables and other normal working capital movements. Finally, as noted in last night’s release, during the quarter, the Board of Directors authorized a new repurchase program of $250 million. We plan to execute this program opportunistically, subject to financial performance of the business, stock price movements, and other external factors. Turning now to outlook for the fourth quarter. Although we have limited exposure to the Middle East across our brands, we did see volatility increase at the onset of the conflict in October, primarily in experiences.

We saw both an increase in cancellations and a deceleration of new bookings in the region. We also saw some impacts in European countries as travel warnings were implemented. Cancel rates receded as we exited the month. October performance has been incorporated in our quarterly outlook. For the quarter, we expect the following; consolidated revenue growth of mid-single digits. The primary drivers of our expectation are mid-single digit declines in Tripadvisor Core and low-20% growth in Viator. We expect TheFork to grow in the low- to mid-teens year-over-year. For adjusted EBITDA, we expect consolidated margins of mid-teens, expanding year-over-year by 400-500 basis points. By segment, we expect an approximately flat margin in Tripadvisor Core despite expected revenue declines.

We expect year-over-year improvement in Viator margin of approximately 350 to 450 basis points and we expect TheFork to benefit year-over-year from cost improvements, and exit at break-even. For the full year 2023, we now expect revenue growth in the high teens, slightly above the outlook we provided on our last call. For adjusted EBITDA margin, we are slightly increasing our expectation from our last call, and now expect consolidated EBITDA margin of approximately 18%. As we begin to think about 2024 on a consolidated basis, we expect to deliver adjusted EBITDA dollar growth that will outpace revenue growth due to the full year profit contributions from both Viator and TheFork, coupled with our approach to balancing investment in Core strategy where the savings we’ve found in 2023 allow us more flexibility to support future execution of the strategy.

With that, I’d like to turn the call back over to the operator and begin Q&A.

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Q&A Session

Operator: Thank you. The first question comes from the line of Naved Khan of B. Riley Securities. Nave, please go ahead.

Naved Khan: Yeah, thanks. Thanks a lot. Two questions for me. It’s great to see the signs of leverage in Viator margins. Just a quick sort of question on how should we think about 2024. So Mike, I think in your prepared commentary you said you expect to see positive margins. But just give us a sense of like, the amount of leverage you are willing to kind of drive through that, understand there is a balance to be played out between growth and margins, so give us your thoughts there? And then maybe, on Accelerate 2.0. Just tell us what your expectations are, are you thinking you can drive more adoption through this revised version of accelerate?

Mike Noonan: Great, thanks for that. Yeah, just on your question one regarding kind of 2024 outlook for Viator. So I think it’s a little early to put a very specific stake in the ground on growth and margin. That’s what we will be developing over the coming, finalize in another couple of months. You know, I think the point we really want to make was one, we’re excited about the portfolio. [Technical Difficulty] Sorry.

Operator: Sorry about that.

Mike Noonan: We lost our connection I think.

Matt Goldberg: I think, yeah, Now — It is Matt. I can assure you, it wasn’t anything you said. It was all. So yeah, you were asking about Accelerate 2.0. and we’re really excited because of course, Accelerate has been a terrific program, which is really conveying clear value as operators opt in for more and more products. More than half of products are opted in at this point. And so what the team has been doing has been really looking at how to expand that program to really boost the operators who are looking for more demand. And this is driving more operators who are willing to participate above the minimum margin, and continuing to boost the take rate. And so we’ve seen more than pretty significant double-digit growth and more products coming in. And the weighted average margin boost is increasing and that’s really delivering a better take rate and so we’re excited about that and we’re looking to scale that as we go forward.

Naved Khan: Understood. And Mike, I think we lost you kind of midway through the commentary on margins, just — is can you just recap it?

Mike Noonan: Yeah, sorry. Too bad. I didn’t know we lost you. Yeah, my points were a couple points on your questions on specifics around Viator. So one, it’s early to give specifics around growth and margin. That’s what we’ll be developing over the next — finalizing next couple of months. The main points we want to convey is one, we are very excited about the portfolio delivering EBITDA growth next year and that’s with all the brands contributing to EBITDA. So that’s point one. Point two, was when we think about full year profitability for Viator it’s what we’ve been talking about for some time. It is the unit economics we’ve been seeing, it’s the repeat behavior we are developing, giving us confidence that we are moving into that area of profitability for Viator. And that’s what’s exciting for us. On the February call we’ll be giving more guidance around this specifically.

Naved Khan: Awesome. Thank you, Matt. Thank you Mike.

Operator: One moment for your next call. The next question comes from the line of Ben Miller of Goldman Sachs. Ben, please go ahead.

Benjamin Miller: Hey, thanks for taking the questions. Just on Viator, you’ve talked a lot about some of the in house work you’ve done to optimize the user experience and customer journey to drive retention and repeat rates, just curious how much of that is still ahead of you in 2024 versus behind you and what that roadmap looks like? And then on the cost savings in the Core and TheFork, how are you thinking about the flow through of that versus reinvestments in both segments? Thanks.

Matt Goldberg: Thanks, Ben I’ll take the first question about Viator product and then Mike, I think will take the second. So I think there is a lot of headroom on Viator product, the team is very focused and disciplined about what it delivers quarter-by-quarter and annually. And we see many, many more opportunities than we can go after. And so, as we look at where we’re focused, we’ve been focused on the app which is driving significantly more app downloads. I think 50% more app downloads, and really thinking about how to improve the post booking journey. And of course, the app converts better than any other surface. So we’re really excited to continue leaning into the app. They’re also spending time thinking about loyalty and how travelers can be rewarded to drive further repeat.

So they’re just testing a rewards program, which will roll out as well. And the initial tests have been really quite positive about items and also lift and repeat. There’s a lot we can do going forward using data. So of course, we have a unified data platform now and the team has been experimenting with leveraging data from across the group including Tripadvisor data to drive audiences that will make it far more effective. There’s also experimentation going on in pricing. And similarly, as we continue to offer award winning customer service, leveraging AI to drive augmented customer service, that’ll be great quality and also improve handle rates significantly. So there is a lot we can be doing. And we’re excited about Q4 roadmap and 2024.

Mike Noonan: Yeah Ben, on the cost savings and just to reiterate a little bit, we’ve said for Core is the 35 million annualized savings and then we introduced our new incremental to that was 10 at TheFork, just to be clear, and there’s no confusion. Yeah, when I think about the question around flow through to next year, I think, one emphasis is that the team has done a lot of hard work this year, like building a great foundation to implement strategy work. And I think that cost savings work is a big piece of that. I think we’re evaluating how to execute against our strategy. our strategy is very important as to in the long term, growth and margin of Core. And so a lot of the work on the savings it allows us the opportunity to evaluate investing, rather than necessarily flowing that all through to margin. And these are the choices that we’re making and evaluating right now.

Operator: One moment for your next question. The next question comes from the line of Lloyd Walmsley of UBS. Lloyd, please go ahead.

Lloyd Walmsley: Great, thanks for taking the questions and apologies if you’ve covered some of this already, but wanted to just dig into the long-term strategy around more integration of generative AI, like what are you seeing so far in your trip planning product in terms of consumer uptake and kind of the overall impact on the platform and how do you see that evolving over the next year, how big of a priority is this and how meaningful could this become? We’d love to get your thoughts on that. Thanks.

Matt Goldberg: Thanks Lloyd. Of course, we’ve been working on AI and ML for a long time in this company, when generative AI became something that everybody was talking about. I was very clear that we have urgency and focus on it and we think about it in three ways. One is what we can do to really drive activity in our product. And you’ve seen us do that with our itinerary builder, and really leveraging our data, the proprietary first party data that we have. Clickstream data, behavioral data to really understand users, and then to deliver an itinerary that is highly personalized, and with the right kind of prompt engineering to deliver a good experience. And that product, of course, is now delivering a really good number of generative AI itineraries.