Investors weren't expecting great news when TripAdvisor (NASDAQ:TRIP) reported its fiscal third-quarter results. The online travel giant has seen shrinking sales in recent quarters as its hotel booking platform struggles to gain traction in a crowded market. Yet cost-cutting efforts have softened the blow, and the company can also credit its emerging dining and experiences segment for diversifying the business away from the challenging hotel niche.

On Wednesday, TripAdvisor revealed that this negative trend worsened over the past few months as competition elbowed deeper into both of its core growth segments. Management called the results "frustrating" but pledged to make the necessary changes to produce a brighter fiscal 2020.

Let's take a closer look.

A couple sits on a pier looking out to the ocean, with a villa suspended over the water in the background

Image source: Getty Images.

A difficult quarter

Sales trends worsened across the board, with revenue falling 12% in hotel bookings compared to a 7% slump in the prior quarter. The experiences unit, which links vacationers to things like restaurants, tours, and entertainment venues, saw its growth slow to 19% from 28%.

Altogether, revenue declines accelerated to 7% compared to 3% last quarter. In prepared remarks, management called the selling conditions "more difficult than we anticipated," while citing the fact that Alphabet's Google search engine is promoting its own hotel products at the expense of its leading organic listings. The experiences and dining platform also failed to live up to expectations as competition ramped up.

Profit pains

Profitability has been a bright spot in TripAdvisor's last few reports, but that hopeful trend reversed itself in the third quarter. Falling demand in the hotel segment produced a 4% decline in adjusted earnings and the experience unit saw profits dive to $15 million from $28 million a year ago. Overall, non-GAAP income dropped 20% to $81 million. Management called the result "particularly frustrating considering we entered 2020 with such great momentum built on strong profit growth, improving auction trends, and a return to sustained hotel [segment] revenue growth."

Each of those rebound targets is threatened by the weakening trends over the last few months, but TripAdvisor believes its new plan is bold enough to meet the new challenges. That starts with working to win business that doesn't depend on Google search placement, including display advertising, restaurant transactions, and hotel business-to-business bookings.

Looking ahead

In a nod to the fact that these shifts worsen TripAdvisor's growth and earnings profile, the company announced some shareholder-friendly moves aimed at balancing returns. The tech stock is delivering a one-time special dividend of $490 million, or $3.50 per share, and raising its stock buyback spending goal. These returns will be funded by internal cash generation and won't impair management's ability to keep investing in the business, CEO Steve Kaufer said.

Finally, TripAdvisor is making a big push into the Chinese vacation market with a new partnership with the newly renamed Trip.com, formerly known as Ctrip.

In the meantime, management's financial target updates all reflect the weaker growth that investors have seen in the past two quarters. TripAdvisor now expects the hotel business will keep shrinking in the fourth quarter along with the full fiscal year and executives don't see SEO trends improving into early 2020. As a result, shareholders could easily see a third consecutive year of weakening business trends as the company adjusts to more unfavorable shifts in the hotel booking niche.