The online travel-booking industry is as attractive as ever, but TripAdvisor (TRIP -0.36%) hasn't yet found a way to turn its vibrant travel community into a robust business. The company recently announced meager sales growth and net losses for its fiscal fourth quarter.
In prepared remarks, CEO Steve Kaufer and his team explained why those results have convinced them to focus on improving profitability over the coming quarters, even at the expense of market share.
Below, we'll look at a few key points that executives wanted to impart in that presentation.
It's a thriving community
The global TripAdvisor platform continues to generate strong network effects.
Visitor traffic grew 17% in the fourth quarter, and over the full 2017 fiscal year, user-generated content like reviews and opinions grew 30%. Executives credited the "refreshed look and feel" of the website and shopping apps for helping them deliver a more streamlined browsing experience that attracted 455 million visitors during the peak summer travel season -- up from 390 million a year ago.
We're not happy with the profit performance of hotels
Hotel segment adjusted EBITDA declines over the past couple of years have been unsatisfactory, however we are encouraged by our recent progress.
Until last quarter, TripAdvisor had posted nearly two straight years of declines in the profitability of its core hotel segment. As recently as early 2016 that division had been booking adjusted earnings margins of 35%, but the rate collapsed to a low of 16% in the third quarter.
Profitability shot back up to 26% of sales over the holiday quarter even though the user base continued to migrate toward shopping on mobile devices. That success was powered by a sharp drop in marketing spending that also resulted in lower user growth. Executives said they are willing to trade a reduced growth rate for a more profitable business, though.
The non-hotel business is strong
While we continue to move our hotel business forward on a more sustainable path toward long-term profitable growth, we continue to rapidly scale our Non-Hotel segment.
The non-hotel business logged a 20% sales expansion in the fourth quarter, compared to a 3% decrease for the hotel segment. That made the segment worth 24% of the overall business, up from 15% in 2015.
The division was solidly profitable for the year, generating $45 million in adjusted earnings compared to a $28 million loss in 2016. Management has been bullish on the long-term potential for the attractions business, which is why they've aggressively added to the portfolio of bookable attractions. Investors can expect to hear more about this segment in 2018 as the company expands its offerings to target an estimated $110 billion global tours and activities market.
Slow growth ahead
We believe our addressable market opportunity, our unique competitive position and our growth strategy position us to return to double-digit revenue growth and adjusted EBITDA margins in excess of what we have operated to over the past couple of years.
Kaufer and his team are aiming to continue prioritizing improved profits from the hotel business in 2018. As a result, that segment should shrink slightly even as adjusted earnings hold roughly steady, they predict. That formula would result in a stabilizing profit trend following three consecutive annual declines. The hotel business shrank from a 37% margin in 2015 to a 24% margin in 2017.
The non-hotel portion will likely enjoy another year of strong sales gains, according to executives, but the focus for now is on capturing market share rather than generating profits. Put it all together, and it's possible TripAdvisor will endure its fourth straight year of declining operating income after the figure peaked at $340 million in 2014 before sinking to less than half that result over the past 12 months.