TripAdvisor’s Turnaround Gets Tripped Up

Coming into TripAdvisor's (TRIP -0.59%) recent earnings report, investors were hoping to see some incremental progress from the company's hotel segment. That side of TripAdvisor's business has largely been responsible for the company's stagnant revenue growth over the past couple of years but had begun to show some improvement in 2017.

However, as third-quarter results made clear, the hotel segment is still struggling to turn eyeballs into revenue, and things aren't likely to get better anytime soon.

Image source: Getty Images

Hotel results head south again

TripAdvisor's hotel segment still drives the company's overall results, contributing more than 70% of its total revenue. After a big downturn in hotel revenue in 2016, results started to look more positive once the company addressed some key user experience issues earlier this year related to its instant booking feature.

Data source: TripAdvisor 

But after two promising quarters, hotel revenue fell 3% in the most recent period. The largest subset of hotel revenue is click-based and transaction revenue (click-based advertising revenue from TripAdvisor sites and transaction revenue from instant booking), which -- after two-quarters of positive growth -- also fell 5%.

There are two factors at work here. First, more and more of TripAdvisor's user traffic is coming from mobile -- which accounted for 45% of all hotel shoppers in Q3. Unfortunately, even though mobile monetization rates have improved now for three consecutive quarters, those mobile users still monetize at a far lower rate than desktop users do. Put simply, the more TripAdvisor's user base shifts to mobile devices, the less revenue the company takes in.

Secondly, one of TripAdvisor's largest advertising partners (believed to be Priceline Group) has lowered the price it's willing to pay for the leads it gets from TripAdvisor's site. The company says this "bid down" phenomenon is to blame for a further decline in revenue per hotel shopper, which fell 11% for the quarter.

Earnings for the hotel segment didn't look any better. Adjusted EBITDA fell 48% year-over-year as the company saw a big increase in marketing expenses -- investing $42 million in Q3 in television advertising.

In spite of these disappointing results, the company continues to believe that TV is the best medium to deliver TripAdvisor's low-price message. In its prepared remarks, the company said initial results from its advertising blitz look positive:

As intended, unaided awareness of TripAdvisor as a price comparison site and as a booking site has grown. When hotel shoppers visited our site in Q3, we continued to see better performance in markets where we were on television compared to our non-television markets in terms of branded metrics such as visitors, hotel shoppers, clickers and bookers. Further, recent Google Trends data suggests that in television markets we have been able to counter-balance some of the branded search share losses that we have been experiencing over the past few years.

The non-hotel segment is killing it

TripAdvisor's non-hotel segment -- comprised of attractions, restaurants and vacation rentals -- has been compensating for the hotel segment's weak results for a while now. But in the most recent quarter, the non-hotel segment appeared to find another gear.

Data source: TripAdvisor

Hotel segment revenue continued on its impressive trajectory, increasing 26% year over year on strong growth in attractions and restaurants.

But here's the bigger news: having only recently turned profitable, the non-hotel segment achieved a record adjusted EBITDA margin of 35%, and contributed almost half of TripAdvisor's total adjusted EBITDA for the quarter. Most of that margin expansion is simply the result of the non-hotel segment achieving greater scale. That foreshadows good things to come, given that the non-hotel segment is expected to continue to grow at much faster rates than the hotel business.

A quick turnaround no longer appears likely

Despite the company's bullishness on its advertising efforts, it's clear that much more is needed to turn around the hotel segment's fortunes.

Management lowered its full-year guidance for click-based and transaction revenue to flat, and its full-year total revenue guidance to "low-single digit" growth. Its vague full-year adjusted EBITDA outlook of "flat to down" was unchanged.

There wasn't much optimism in TripAdvisor's initial thoughts on 2018 either, as the company says trends in click-based and transaction revenue are unlikely to change, creating a continued drag on hotel revenue.

TripAdvisor's crown jewel continues to be its steadily growing base of highly engaged users. The company reported 455 million monthly unique visitors in Q3, up 17% from last year. That's an incredibly valuable asset -- one that TripAdvisor's competitors would no doubt love to own themselves. I'm certainly not the first to suggest it, but if TripAdvisor isn't able to turn around its struggling hotel business soon, I wouldn't be surprised to see the company acquired by one of the larger online travel agencies.