TripAdvisor Earnings Update

TripAdvisor reported earnings earlier this month, and the key points are as follows:

  • Revenues fell 3.5%
  • Expenses rose 5.2%
  • Net Income fell 41.4%
  • Hotel Revenue fell 7.9%
  • Non-Hotel rose 21%

Revenue Per Hotel Shopper fell 19% which led the decline in Hotel Revenue. Two other important metrics are worth noting:

  • Unique hotel shopper growth rose just 3% after rising 22% and 17% for Q2 of 2015 and 2014
  • The number of unique visitors fell from 375 million to 350 million or a 5.4% decline Q/Q

Revenues per hotel shopper continue to decline as Expedia’s ‘Revenue Per Room Night’ is also falling at a slightly slower pace. Expedia’s Revenue per room night growth for Q2 and FY 2015 netting out the eLong acquisition was -5% and -14%. Since TripAdvisor derives a significant portion of revenues from Expedia, this decline is passed down to Trip.

According to TripAdvisor’s management team:

We’ve also called out that we did see some softness particularly in June and into July, which we think might be impacted by the macro environment, by the various events that we’ve seen around the world, be it terror-related or economic events like Brexit, and we believe that has made an impact on us as well, on the volume side, on the number of shoppers side, and perhaps also on the revenue per shopper side.

The points made in the above statement are moot because these issues preceded Brexit and the European terrorist attacks – Priceline also had a fantastic quarter. The growing ‘Non-hotel’ segment is a roll-up of acquisitions the company made over the past few years. The acquisitions have no competitive advantages, and they are diving head-first into saturated markets with inevitable razor-thin margins. One example is Viator which offers tours and activities using the Groupon business model of selling coupons for activities. The segment is burning cash and destroying value while Trip’s core business continues to struggle.

  • Revenues are declining
  • Expenses are still rising
  • Investors expect growth in 2017

Management also evaded a question about FY 17 revenues as they did with FY 16 when they said they would no longer give guidance conveniently right before the top-line issues came to light. The question came from Robert Peck of SunTrust:

And then, Ernst, as we think about 2017 and what could be more of a normalized growth rate on the top line or stabilized margins, that would be helpful as well. Thanks so much.

Ernst, Trip’s CFO answered:

Your second part of the question about 2017, in February we made some statements painting a picture for the shape of 2016, but also into 2017. We have no reason to update that today, but I also don’t want to put a finer point to that. The teams here internally will start to shift over the next month, a more detailed planning for 2017, and when the time is right, we’ll provide you some appropriate comments about 2017.

Instant Booking is out, and there are no more excuses. At 61x earnings, expenses growing faster than revenues, and revenues declining, 50% downside is a fairly conservative forecast. 2017 should prove to be a pivotal year for the company. I’m looking to refinance the puts through 2019, so whenever the Jan ’19 puts become available, I’ll buy more. If I do get the portfolio cash down to the 20-25% range before that period, then I’ll most likely just add more Jan 18’s $40 puts.

Update

Hi Guys,

I’ve been a bit sick and also really busy lately, so I haven’t posted anything in about 3 weeks. So I want to update, there will be no ‘Official’ May Performance Report, but I’ll summarize the updates on each position on here as of today’s date (5/5/2016) – Happy Cinco De Mayo btw – Regular monthly performance reports will commence in June. The portfolio rose 0.49% vs 0.39% for the S&P 500. The portfolio is still about 50% invested, it’s difficult to find bargains in this market – most of the ‘cheap’ cyclical stocks are stuffed with overvalued inventories that still need to be written down, so I don’t want to buy something just because it looks cheap. I’ll update for the other indexes later on the homepage, but I believe it underperformed all other indexes except the S&P.

Flanagan Enterprises (BDL)

I want to start with BDL since I purchased this stock mid last month but didn’t have time to post about it. This is going to be a very brief summary of what I would have written. I purchased this at $21.2, the stock trades at about $18/sh so i’m about 15% underwater now.

In a nutshell, the company owns and operates restaurants and liquor stores in the Florida area. The company still generates mid to high single digit comparable store sale numbers and is growing at 10% and yet it trades at about 11x earnings.

The company partners up with other investors on the restaurants and the way the partnerships work is that the company pays the investors with the cash flows and collects no management fees beyond the money required for regular operations. Once the investors receive their invested money back in full, then the cash flow each restaurant generates is split in half between the company and the investors. So, the company is basically guaranteed to increase the bottom-line in the future. This won’t happen quickly, but if you were to model this out, the company should at least trade somewhere around 15-20x earnings. So I believe there’s at least 50% upside from these prices. S&P’s P/E ratio is about 24x, so the current P/E is less than 1/2 of S&P’s.

While the company carries about $10 million in debt, it also owns about $20 million of land and property in florida, so there is sufficient equity to conservatively eliminate the debt from any valuation calculations.

Please note that BDI and BDL are different. BDI is Black Diamond Group Ltd, BDL is Flanagan’s Enterprises.

Other Positions

Before doing this, I want to send my thoughts and prayers to the people of Fort McMurray. As some of you may have heard by now, there is a massive wildfire in the Canadian city of Fort McMurray. The city has been evacuated – though no casualties have been reported, people have lost their homes and belongings.

Canadian Trail

(Longs)

The Canadian stocks have basically offset each other over the past few days. Gamehost down 17% because of the Fort McMurray fire (more below) and Black Diamond up 28% today because it has excess capacity for temporary housing in the Oil Sands around that area.

Gamehost Inc.

Gamehost was my largest position just a few days ago. One of Gamehost’s Casinos – Boomtown Casino –  is located in the city of Fort McMurray. With the wildfire causing a complete evacuation of the city, the effect on earnings becomes obvious. Less activity at the Casino – if it even survives -and thus, less earnings for gamehost. I called the company two days ago to get more information before posting about this, but they were swamped with thousands of investors attempting to ask the same question I was – Is the building insured?

Per the company’s filing on Sedar yesterday:

The Company’s Boomtown Casino in Fort McMurray, Alberta is fully insured including property and business interruption coverage. All Gamehost properties and operations are fully insured by a leading multinational property and casualty insurance company. Management has initiated an insurance claim in anticipation of losses at our Boomtown Casino and is currently in discussions with the insurer regarding due process.

I had a 37% equity in the position wiped down to about 16%. I’m going to add more when I trim Black Diamond. I want this position and Black Diamond Group (See Below) to make up 25% of the portfolio. Any more positions on Canadian stocks will be hedged with futures or put options shorting the CAD to reduce currency exposure.

Black Diamond Group Ltd

BDI reported earnings yesterday and shot up 28% today – I don’t believe it was because investors liked the earnings, but because of the fire in Fort McMurray since BDI provides temporary housing. Total equity in this position is +19% and it’s now my largest position after the Gamehost decline.

The company reported:

  • 47% q/q decline in revenues and Q1 EPS of -0.06.
  • Total debt q/q down 20%

As I mentioned in the original thesis, the dividend was cut down to pay down debt and the company will still be cashflow positive even though earnings will turn negative. So that’s precisely what we’re seeing. While the company reported a loss of $2.4 million, it actually took in about $10 million of cash for the quarter. This is because of the discrepancy between the CapEx and Depreciation I mentioned in the original thesis.

The company has historically sold its used fleet for above book prices, but since the industry is depressed. Assuming a conservative 20% haircut on book value, the company will still trade below the new book value – this means we’re basically getting the company for free! The positive FCF and debt repayment should continue while we wait for the industry to recover.

The fire in Fort McMurray is providing support to the price, so as of 5/5, it makes up about 13% of my portfolio after the +28%. Once the stock surpasses book value, I’ll trim it down to 10% of the portfolio.

United States’ Trail

Pacific Health Care Organization

No new news on PFHO, but it has been fairly volatile. The illiquid nature of the stock leads to large swings in price. I’d buy more, but the bid/ask spread irks me. Price target remains the same at about $14/sh

Pier 1 Imports

Pier reported earnings and guided to higher margins as I anticipated in the original post. One mistake I made however, was ignoring the competitors. Piers inventories were so far in line that I thought their competitors would be irrelevant, but they are not. Virtually every cyclical company is stuffed with overvalued inventories that will have to be sold off. The company did guide to higher margins and is first in line for the industry recovery, so I’m holding on for now.

Trip Advisor (Short)

Reported earnings earlier this week. Revenues declined but investors are still not paying attention to the more important declining metrics – Trip’s Revenue per hotel shopper and Expedia’s Revenue per hotel night.

The company has investors convinced that their ‘successful expansion’ in China will fuel growth will 2017 while 2016 ‘will remain muted’. The same China where iPhone sales just fell (-25%) off a cliff?  They have been deceived into pricing a company with declining revenues at 45x earnings. The company will have to fight an uphill battle with growth since the price of the service is in a deflationary spiral.

CarMax (Short)

CarMax’s inventories remain elevated. One mistake I made on this one was buying short-term (1 year, January 2017) puts. I regret that and will get rid of all 2017 put options on the portfolio next time we have another volatility stint.

Recovery rates y/y fell from 54.2% to 51.2%. Inventories fell relative to sales, which is actually good. Past due accounts and LTV ratio trickled up a bit. The U.S. economy continues to slow and I believe we will likely see easy credit slow, which is bad for CarMax.

LuluLemon (Short)

Lulu reports earnings later this month. I’m going to address the company after that happens. I’m still yet to add my January 18′ put, but if the stock sees $65 again, I’ll add January 18′ put options.

Mind CTI Ltd

Reported earnings this week as well. Revenues fell 19%. This was expected. As I mentioned, the company’s sales has historically risen over the long-term but have wildly fluctuated, which is why it trades at 5x its Enterprise Value. Its 10% yearly dividend is basically a unicorn in today’s market.

 

TripAdvisor Earnings Update

TripAdvisor reported earnings today, the stock was up 12.3%. The value of the put options for the portfolio did not move, we remain in the green.

Few things to note from the earnings call:

  • Management says that they will not forecast revenue or adjusted (Non-GAAP) EBITDA anymore
  • Management says hotel revenues (91% of total revenues) will be “muted” in 2016 and resume growth in 2017
  • SG&A will keep growing faster than sales as they do what is right for the long-term of the business

I had mentioned this in a comment on Seeking Alpha, but not in my actual write-up before the earnings call. I’m going to pick out the parts that matter, but you’re welcome to read the entire conversation here (slightly edited this for easy comprehension):


I’m saying that gross margins are falling because they are losing pricing power to customers, while they are still aggressively marketing! Profits per user keep falling, while costs per user keep rising! We’re going to look at the revenue per hotel shopper metric which management says is what they use to measure how effectively they monetize hotel shoppers. TRIP has no control over this, Partners will always revise their bids, and these Cost Per Clicks (CPC) are going to trend lower over time because everyone is going to try to corner market share by charging lower prices. This ALWAYS happens in perfectly competitive industries. This is from FY 2014 10-K:

CPC prices are determined in a bidding process that allows our partners to use our proprietary system to submit CPC bids to have their rates and availability listed on our site. When a partner submits a CPC bid they agree to pay the amount of that bid each time a user subsequently clicks on the URL link to the partner’s website. Bids are submitted periodically – sometimes as often as daily or weekly

Start with FY ending 2012:

“The primary driver of the increase in click-based advertising revenue was an increase in hotel shoppers during the year ended December 31, 2012, when compared to the same period for 2011, of 32%, partially offset by lower revenue per hotel shopper of 8% for the year ended December 31, 2012.. ”

Then FY ending 2013: “Revenue per hotel shopper decreased 13% for the year ended December 31, 2013 ..”

FY Ending 2014 (This increased because of hotel metasearch, which will be a one time benefit):

“Revenue per hotel shopper increased 7% for the year ended December 31, 2014 in comparison to 2013, and decreased 13% for the year ended December 31, 2013 in comparison to 2012, according to our log files. Revenue per hotel shopper increased 7% for the year ended December 31, 2014, largely due to our implementation of hotel metasearch completed in June of 2013, which has resulted in higher CPC pricing paid by our partners, due to higher quality clicks being delivered, offset by relatively lower rates of hotel shopper conversion.”

FY 2015 Q1:

“Revenue per hotel shopper decreased 5% and increased 1% for the three months ended March 31, 2015 and 2014, respectively, according to our log files.”

Take a look at 2015 Q2 and Q3, and you’ll see the exact same thing. This number is not just decreasing because of the strong dollar (I agree that the value of the USD does affect them), it is decreasing, because the laws of economics say so! You cannot keep growing costs at a faster rate than revenues in these sort of industries, it’s just not sustainable. There are already tons of competitors in china (Ctrip, Qunar merger), who will price them out. Every marketing $1 they spend in China will result in less than $1 in profits.


 

Those were excerpts from a comment I posted on seeking Alpha.

Expedia reported Q4/year-end earnings yesterday and I noted that “Revenue per (hotel) night fell 11%“. Look back to Expedia’s Q3, -15%, in Q2, -16%, in Q1, -13.6%. Expedia’s management mentioned that only a portion of the decline was aided by the strong dollar. This is what really brought TripAdvisor’s CPC growth to a screeching halt (it fell 1% for the quarter, CPC accounts for 60% and hotels account for 91% of Trip’s revenues). Priceline and Expedia make up 46% of TripAdvisor’s revenues.

This is the same phenomenon we see in retail where inventory is rising faster than sales (inventory turnover falling) which precedes the ensuing losses. The difference is that with retail, the losses move from the balance sheet to the income statement, whereas we see the decline in the income statement directly in this case. They sell no tangible goods, so the sales and marketing expenses are equivalent to inventory.

Importantly, we anticipate that revenue per hotel shopper and therefore both click-based revenue growth and hotel segment growth rates will reaccelerate in the back half of the year as we start lapping the instant booking roll out in the U.S. and the UK and also meet easier Meta CPC pricing comps. Despite this reacceleration in the second half, we expect growth for the full year to be muted. – (Source: Seeking Alpha Transcripts)

They mentioned that Hotel growth is going to be “muted” for 2016 and will resume growth in 2017, even though the revenue per hotel shopper will grow as a result of the instant booking rollout. And once again, expenses will grow faster than revenues. How sustainable is this? For a new company, brand awareness is important and they will need to spend more $ on sales and marketing expenses. TripAdvisor has been around since 2000, already been in several countries. The reason why SG&A is growing faster than revenues is because the Revenue per hotel shopper is falling. Revenue per hotel shopper is falling because of the price wars coming from upstream (Expedia et al.), and it is only going to go lower in FY 2017 after the effects of the instant booking is worn-in.

They said that sales will be flat for FY 2016 and that they would no longer give revenue or profitability guidance; they basically covered all their bases, and the stock rose. Irrational exuberance’s finest. The difference between Priceline, Expedia, and TripAdvisor is that Priceline and Expedia have P/E ratios of 21 and 17, while TripAdvisor sits at 40. The only way I see this short going wrong is if the company gets acquired by dumb money. Priceline owns Kayak, and Expedia actually spun-off TripAdvisor, so I don’t necessarily see either of them acquiring the company. Nonetheless, the risk of acquisition is the only reason I’m not doubling down as there is a lot of dumb money floating around internet stocks. The puts will remain 1% of the portfolio. Puts are January 2018, $40 strike fyi.

Mazi Ume

Trip Advisor: Falling Margins and Low Mobile Conversions Creates Shorting Opportunity

Current Price: $63.21 (2/3/2015) Market Capitalization: $9.11 Billion
Enterprise Value: $8.80 Billion P/E: 40
Price Target: $31.6 (~50% downside) Time Frame: 12 – 24 months

Real Time price: TRIP 36,96 +1,22 +3,41%

TripAdvisor Price Chart
TripAdvisor Price Chart

This has been on my short watchlist for a while, but I have been so focused on filling the long part of the portfolio. I’m not a fan of shorting amidst volatility since I short with put options. The price has fallen from $85 at the beginning of the year to $63 today for no fundamental reason. It has simply been the result of the Chinese slowdown and low oil prices. Nevertheless, I feel that at $63, the stock is still overpriced.


Business Model

TripAdvisor, Inc (NASDAQ: TRIP) is a website that provides reviews of travel-related content. The reviews are posted by its users and are accessible to anyone. TripAdvisor operates in two segments:

  • Hotel – Includes revenues generated from services related to hotels. 91% of Fiscal Year 2015’s revenues were derived from the hotel segment.
  • Other – Segment accounted for 9% of Fiscal Year 2014’s revenues. The segment includes three sub-segments:
    • Attractions – This sub-segment primarily includes the 2014 acquisition, Viator. Viator is a website for researching and booking destination activities around the world. Viator works with local operators to provide travelers with access to tours and activities in popular destinations worldwide, earning a commission for such service.
    • Restaurants – This primarily includes the recent acquisition, Lafourchette.  Lafourchette is an online restaurant booking platform with a network of restaurant partners across Europe.  Similar to OpenTable in the U.S. that was recently acquired by Priceline. Lafourchette also offers management software solutions helping restaurants to maximize business by providing a flexible online booking, discount, and data tool. Lafourchette makes money by charging a fee for each restaurant guest seated through the online reservation systems.
    • Vacation Rentals – The company offers individual property owners and property managers the ability to list their properties available for rental and connect with travelers using a subscription-based fee structure or a free-to-list, commission per booking based option. The properties are listed across TripAdvisor Vacation Rentals, U.S.-based FlipKey and the European-based Holiday Lettings and Niumba businesses.

TripAdvisor generates revenue through the following channels:

  • Click based Advertising – Includes links to the partners’ booking sites. Partners are online travel agencies (Expedia, Priceline, etc.,). These partners pay TripAdvisor for directing traffic to their websites.
  • Display-Based Advertising – A variety of display-based advertising placements on the websites through which the advertising partners can promote their brands.
  • Subscription & Transaction Based – This includes subscription-based advertising products offered to Hotels, the transaction based restaurant (Lafourchette) booking, and property listings (Flipkey and TripAdvisor vacation rentals, etc.).

TripAdvisor has grown revenues at a staggering CAGR of 17.8% since 2012 (Chart 2). Trailing twelve revenues for 2015 was $1.47 Billion.

TripAdvisor Revenue-Chart
(Chart 2) TripAdvisor Revenues

The company reported net income of $226 million for the Fiscal Year ended 2014, and so far (TTM), $231 million.

Why Short Such A Great Growth Story?

Margin Compression Amidst Competition

Revenue growth numbers only tell one part of the story – the other side is the gross and operating margin compression trend.

 

Trip Operating & Gross Margins
(Chart 3) TripAdvisor’s Gross & Operating Margins

Operating margins have been hit, falling from 50% in March 2011 to the 20s as of September 2015 as a result of the rapidly growing SG&A expenses. Falling gross margins from 98.5% in March 2011 to 96.14% in September 2015 indicate pricing power erosion as a result of growing competition (Google Hotel Finder, Bing Travel, Yahoo! Travel, Airbnb, Yelp, etc.) in a moat-less industry. For Google and Bing, this is just another feature for their users, but for TripAdvisor, it’s 91% of their revenues! Also, Expedia and Priceline accounted for 46% of the total revenues for Fiscal 2014. Because they account for such a large percentage of Trip’s revenues, they get the better end of the stick at the negotiation table. Unlike other industries where brand power is significant, customers of the online/travel industry only care about who can provide the goods or services at the lowest possible price, and they will shop around until they find it. A price war ensues between travel sites like Priceline and Expedia, and Airlines who in turn place pricing pressures on referrers like TripAdvisor. Even Lafourchette, TripAdvisor’s restaurant booking segment in Europe, will inevitably face price wars.

SG&A as percent of Sales
(Chart 4) Selling, General & Administrative Expenses as a percent of Sales

As I mentioned earlier, Selling, General, and Administrative (SG&A) expenses have been growing faster than revenues since the company went public, specifically marketing expenses. The company was founded in 2000, and 16 years later, we have SG&A growing faster than revenues. Obviously, at some point, SG&A bottomed and then started rising against revenues, it speaks volumes about TripAdvisor’s eroding pricing power and position in the industry. Though the online travel industry is still in a growth phase, competitors are flocking in by day and night. This means that over the long-term, TripAdvisor’s gross, operating, and profit margins are going to keep falling. This does not bode well for a company with a P/E ratio of 40.

MOBILE ISSUES

Management praises the growth in mobile users, then reiterates that it’s bad for business.

We reached nearly 175 million cumulative mobile app downloads and approximately 50% of TripAdvisor traffic visited was via tablets or smartphones in 2014. Average monthly unique visitors via tablets and smartphones grew over 60% year-over-year to approximately 140 million for the year ended December 31, 2014, according to company logs.

50% of TripAdvisor’s traffic was via tablet in 2014 and growing at 60%, but then in the Risk Factors section:

Growth in the use of devices other than desktop computers may negatively affect our revenue and financial results.

Our content was originally designed for users accessing the Internet on a desktop computer. The number of people who access the Internet through devices other than desktops computers, including mobile phones, smartphones, handheld computers such as notebooks and tablets, video game consoles and television set-top devices, has increased substantially in the last few years.  We anticipate that the rate of use of these computing devices will continue to grow. The lower resolution, functionality and memory associated with some of these alternative devices make the use of our products and services through such devices more difficult and versions of our products and services developed for these devices may not be compelling to users.  We have developed services and applications to address limitations of these devices and our advertising revenues continue to grow, however, we monetize users of these devices at a lower rate compared to users who access our websites through desktop computers.  

later on..

In our experience, hotel shoppers visiting on mobile devices generally exhibit a lower rate of conversion, monetize at a significantly lower rate than hotel shoppers visiting via desktop or tablet and emerging international destinations tend to have lower CPCs associated with them.  A growing percentage of our hotel shoppers are using mobile; this trend will create pressure on the revenue per hotel shopper metric, particularly if we fail to realize the opportunities we anticipate with the transition to more mobile users.

As management mentioned, the mobile devices accounted for 50% of Fiscal Year 2014’s traffic and grew 60% year over year. If mobile shoppers exhibit a lower rate of conversion and monetize at a significantly lower rate than desktop users, then where is this business headed?

SHORT STRATEGY

Bought the January 2018 $40 put options for $3.90. Trip reports earnings next week; I’m not a fan of speculating quarter over quarter on what earnings will be, but I do know that over two years, margins and profitability should fall.