It's been a good year for Stephen Kaufer, president and CEO of TripAdvisor, who received a raise from $300,000 to $500,000 base salary, according the company's 8-K filed in April.
Perhaps Kaufer's fatter base salary is deserved. TripAdvisor's third-quarter earnings rose 9.3% on balanced revenue growth. The markets certainly liked the latest top-line numbers and upbeat conference call.
In an interview with CNBC, Kaufer said:
It's a testament to the momentum that we're on now. It's less than a year that we've been a public company, and we show growth in literally all the interesting metrics, whether its traffic, or membership, or social contribution, and certainly revenue.
But there may be worrisome trends lurking below the surface. Many stock analysts had "neutral" ratings on TRIP before its price spike yesterday. That was 11 "holds" out of 15 analyst ratings as of October 30th.
Zacks' target price is $32.30, below this afternoon's quote of $35.
What gives?
Marketing its way to traffic
The Newton, Mass.-based company touts its growth in traffic, but the company's sales and marketing spend to get that traffic has been relatively high and growing.
It is expected to spend $258.6 million on sales and marketing in fiscal year 2012, up from $206 million the year before. The number is forecast to grow to $315 million in the next fiscal year.
A research report by Herman Leung and Deepak Mathivanan at Susquehanna International Group notes:
The company’s large customer concentration to two online travel agency partners, Expedia and Priceline, means that it can vary its marketing spend based on performance.
Additionally, TripAdvisor is also investing in building out its own sales & marketing teams to focus on emerging businesses, such as vacation rentals, tempering profit upside in the medium term.
Let's hope so. On a non-GAAP basis, sales and marketing expenses are averaging a third of revenue in recent quarters.
Relationships with hotel partners could be better
To improve things on the bidding side, TripAdvisor began last month to test a new analytics platform with a select set of major OTA clients in 3 test markets. The goal of the reports is to help its partners to rationalize higher per-unit or per-click advertising expenditure.
Brian Nowak, vice president at Nomura Securities, said in an alert today:
"The company said it has begun testing its property rank reporting and enhanced analytics with some of its large OTA partners (in order to help them better understand the ROI of TRIP ad spending)
That said, TRIP has nothing to report on progress around the tests.
We are happy to see TRIP rolling out analytics to improve their advertiser relationships, but in our view there is still a lot of uncertainty around their impact on near-term ad spending, as well as their ability to increase long-term advertising budget share."
The company expects to have minimum CPC-per-property thresholds in place in early 2013 for its domestic US market.
Mobile strategy performing well... yet
TripAdvisor hasn't been monetizing mobile as well as Facebook or other companies. One problem: Pop-up ads that were poorly designed for the smartphone user experience.
Tablet search comprises about three-quarters of the user-generated site's mobile revenue, which is odd, given that there are far more smartphones in use.
To turn around this trend, the company expects to roll out hotel metasearch display on smartphones, showing partner rates and availability to all smartphone traffic by the end of the year.
That's a different tune from what the CEO was singing six months ago, when he told investors that the company had made a conscious decision not to monetize mobile fully at this time.
Riding the revenue coattails of its partners
About $2 million of the company's out-performance was derived from revenue gains because of the booming performance of its online travel agency partners Priceline and CTrip.com, according to Susquehanna research.
The online giant also continues to be vulnerable to changes in Google's algorithm and Google's drive to have more of its users writing travel reviews on Google Places.
Declining in growth markets
While Priceline Inc. and CTrip.com are booming on sales in Asia-Pacific and Australia, TripAdvisor isn't seeing comparable levels of pick-up in APAC. The company's only growth story in Asia is that it has added three regional Asian OTAs, including Asiarooms, plus increased advertising spending in China.
TripAdvisor needs more growth in the East, as the deterioration in economic conditions in Europe keeps on rolling.
Facebook follies
As Skift has noted, "TripAdvisor might find Facebook to be a disappointing channel." Just read between the lines of Kaufner's comments in the analyst conference call yesterday.
"So Facebook remains a meaningful channel to grow our brand awareness and to grow our membership. I've tried to be reasonably clear that we don't view it as a very large traffic acquisition channel, certainly not compared to a channel like search.
So you have folks on Facebook that are engaged in sharing and learning about what their friends are into, posting photos and the rest. And at many times, they're interested in interacting with our brand, with our Cities I've Visited or seeing a status update from their friends about the trips that they've taken.
The Cities I've Visited app, to use it, you're joining TripAdvisor, and you're telling us something about yourself, namely all the different places that you've been. You're also giving us your friend network so that we can share all those places that you've been as data when your friends come and browse on TripAdvisor.
To recap, Facebook as a member acquisition channel is quite strong for us because we spend a certain amount to advertise our map and TripAdvisor applications, we get a certain uptake, that's at a somewhat expensive rate.
That's sort of qualitative because it's just a member, it's not a travel booking yet.
But because of what those folks are doing with the app, it's generating invitations to other users, it's generating status feeds, it's generating Open Graph items and I can go through the laundry list of Facebook viral channels, which in turn are generating a lot more members for us for free.
We're not having to pay to acquire. So we continue our spend on that channel because it helps us grow our membership and it helps us grow our social content, namely knowing where your friends have been to in order to make progress on our social and personalization efforts, which I've touched upon.
So think of it as building a huge database of travelers, travelers who happen to be Facebook connected. We're learning more and more about them, whether or not they've been to TripAdvisor yet, we're teaching them about TripAdvisor, and we're getting the click-through rates and the emails that say, "Hey, they're interested in this. So they're coming back."
And then the longer-term question is and through that mechanism, will they be converted to the more domain-direct, the more branded association. We see positive signs, but the jury is still out by several quarters, in our opinion, as to whether that's going to move the needle as much as we hope going forward.
In short, much of the spending on Facebook may not be boosting TripAdvisor's bottom line —now or ever. Given that TRIP's Debt/Cap ratio is 36%—well above the average of 6% for travel companies monitored by Zacks—the company needs to tread carefully.
Overall, the verdict is still out on the success of the IPO, which was created in a spinoff from Expedia.