Tripadvisor, Inc. (TRIP) Earnings Call Transcript & Summary

Great. Thanks, everybody, for joining us. We're super excited to have Ernst Teunissen, CFO of TripAdvisor, joining us this morning. And my name is Deepak Mathivanan. I'm the Internet analyst here at Barclays. So we have about 20, 25 minutes, and I'll go ahead and ask a list of questions to Ernst. So Ernst, thanks for joining us.

Yes. Thank you, Deepak, and thanks, everyone, who's here virtually. I can't see you, but you can see me, hopefully.

Yes, times we live in. All right. So I'll kick it off with an obvious question. The last few months have been challenging, obviously, for everybody in the travel space. But now we have light at the end of the tunnel with the vaccine development. Clearly, there's a lot of optimism in the investors mind about the vaccine and the potential timeline of demand recovery. How are you internally thinking about the outlook for 2021 in terms of demand recovery? Are there any kind of inputs that you're seeing in your business internally with respect to kind of traffic trends or [indiscernible].

I lost you there at the end, Deepak. Can you hear me?

Yes. Yes. I think I was just phrasing it as, are there any signals that you're seeing in terms of traveler searches or traffic that might provide some information on that?

Yes. Yes. So look, we are very encouraged by the medical developments, of course. We've said throughout this, that is going to be the key catalyst. That is going to be the key catalyst of how people really feel safe to travel and come back to a sense of normal. And so it feels now that we get some concrete plans about the rollout and some certain -- we can also get some certainty of how and when this travel market can recover. The consensus view, and this sort of our view as well, seems to be that we're going to have a vaccine rolled out in North America and Europe in half 1 which means we can really start looking forward with some anticipation to the half 2 of 2021 and then into 2022. We continue to expect, as we called out in our last earnings call, that it's going to be a little uneven until we get there. We saw that -- we've seen that in Q4 with the recent case spikes both in North America and in Europe and in particularly in Europe, some lockdowns in Q4. Hey, we expect that kind of volatility to continue into early 2021 as we enter 2021. But that, sort of, timeline for the vaccine is really what we're looking for as the starting gun for the market to come back. We saw last summer that there was actually a pretty decent recovery even in the state, the vaccine or the COVID pandemic goes in, in the summer. We got back to 35% of the level overall of revenue compared to last year. But restaurants and some markets in Europe, we were actually above the previous year on the restaurant business. So we think the market will be -- respond robustly to vaccines being rolled out. And we think, frankly, that there's actually quite some pent-up demand in travel right now. Like we all have been unable to travel in 2020. We think people are really looking forward to going back. And so we are very encouraged. We obviously have a long way to go to get back to sort of prior levels in the travel market, but we are very happy and grateful for all the work that's being done on the medical side. I think that's going to be -- is a very optimistic start to 2021 for us.

Got it. And then another interesting travel behavior over the past few months is the shift towards alternative accommodations. Clearly, it made a lot of sense during the pandemic. And how are you thinking about -- what are your thoughts on how the mix between native accommodations and hotels likely to be during -- I mean during the post pandemic period? Clearly, some of the consumers have experienced the value prop of alternative accommodations for the first time, and they could inform what the mix looks like going forward. But we're curious on your thoughts.

Yes. A little hard to know how that's going to shake out. We saw -- we also saw a nice pickup in our rentals business, and we understand why consumers, in a time of pandemic, would be looking at this type of accommodation. There are many comforts and wonderful experiences created by owners and operators of traditional lodging as well. And I think consumers are -- as we get out of the pandemic, are going to look forward to getting to sort of fresh sheets and all the services hotels can offer. So we do think it make a ton of sense for alternative lodging to grow as fast as it did, but we also think that people are going to look forward to going into hotels again. How much of that is it more permanent or near-term trend? That's really hard to know. We're -- we feel we're well positioned to both hotels and rentals being strong going forward.

Got it. Got it. Okay. No, that makes a lot of sense. Okay. I'll ask one obligatory near-term question. You touched upon this briefly about the 4Q trends. I mean, clearly, trends were volatile. And even on a month-to-month basis, things changed quite dramatically in many geographies. Are you seeing kind of stabilizing signs in any of the markets that kind of went into a second wave a little bit earlier than U.S. and Europe at this time? Or have things been pretty uneven throughout?

Yes. We called out in our earnings call, last earnings call, that we were expecting Q4 to be somewhat uneven, right? And it's definitely what we're seeing. And especially sort of in the period of the last week of October, in the beginning of November, where we saw these huge spikes in Europe, in particular. We saw a market downtick in that time period in terms of traffic, in terms of revenue. We've seen it sort of stabilize and slightly tick up a little in Europe since those -- since that sharp downward trend, but it's still below Q3 where we are. But an encouraging sign, nonetheless, that it stabilized from the levels we saw in early November. As I said in my -- response to your first question, look, we're going to see this sort of choppy environment even into Q1 of the following year. As you'll see this -- you see surges and then receding of surges. As I said, it's really the moment where we have the vaccine rolled out that we can really look forward to a more stable recovery path. And so we're not discouraged by the fact, we're disappointed, obviously, by the fact that Q4 took a bit of a step back in the recovery and more lockdowns. But we're not discouraged by it. We are looking past that, and we're looking at how can we be in the position, the right position to catch the wave when the vaccine is rolled out in the market is going back.

That's definitely great news. All right. So one more question on a little bit more of a near-term trend. How has supply side being on the Restaurants & Experiences business? Clearly, these are categories that probably struggled the most. And some of them are independent with low capital access. Have you seen any material disruption on that side during COVID?

Yes. You've got to have a lot of empathy for these entrepreneurs, right? These restaurants and these experienced suppliers. My god, they had a great business and their revenue went, in some cases, almost to 0 and for periods of time to 0 when they have to close down. A really tough time. We've seen -- actually seen quite a bit of resilience, though, in the supply base, restaurants and experiences. And although many of them had to shut down. We believe that also many of them will be able to come back in -- when the market comes back. So we expect supply to come through in a reasonably good shape. And just as a reminder, to everyone, of course, our revenue and our platform is not really driven by the number of suppliers that -- in restaurants and experiences, we monetize the consumers that come and look for things to do work places to eat. And as long as we have a wide selection of that, which we will -- I think we will have plenty of. Our revenue is not necessarily impacted by disruption on supply side. But as I said, I think we've been reasonably surprised. We're even surprised that the resilience actually of these restaurants and experience owners. I also want to call out that as we recover online booking penetration in both categories, both in restaurants and experiences, has been really low. And it's like it's been a low in 2020, of course, but it was very low in 2019. So we are hopeful that when this pandemic is in the rearview mirror, we can start benefiting from the conversion to online that we were expecting, nonetheless. Hey, and maybe we're going to benefit also from the fact that in this pandemic, you've seen the relative performance of all online players outside of travel. And I think the pandemic has taught people that online booking is -- online booking anything. It may have accelerated that trend. So maybe on the experiences side, where traditionally, the online penetration restaurants, especially in Europe, online penetration has been relatively low. Maybe a positive out of this dynamic will be that we hit the ground running with more of our consumer base actually looking for online booking rather than offline booking.

That's interesting. Okay. Switching gears to the product side. Can we talk about the subscription offering? When are you planning to launch? And what would be some of the initial goals that you set for that product? How are you planning to measure this progress there?

Yes. We are excited about the prospects that we have on the consumer subscription offering. We're going to launch that in the near term, I would say. And it's a unique opportunity for us to serve our very loyal consumers on our site. You know we have 400 plus million, 400 million plus unique users on our site every month. We did in 2019, and we'll get back there. So we have a huge audience. And we think we can offer them another attractive proposition, and that proposition would be at a fee. We publicly said, "Hey, we're targeting about $99 per year", which we think is very affordable and very comparable to some other medium-cost subscriptions. We can offer them as a series of pretty attractive discounts as well as perks and other benefits when they book a hotel and experience a restaurant on our platform. We have a lot of people looking for early up funnel looking for making trips for $750 total value, $1,000 plus total value. And if you look at that base, then you say, if I could give them something like 10% off, that will -- that subscription is complete no-brainer for them. And not necessarily very cannibalistic to us because, as you know, we have a lot of people looking on our site and the actual conversion to us to actual -- the percentage that we monetize on is lower because there's a lot of leakage on our platform. People come to look on TripAdvisor, but then they leave and book somewhere else. And so we believe there is actually some untapped demand there that we can tap with something like a subscription fee. So we feel pretty bullish about that. We're obviously launching that at the tail end of a pandemic. We're actually in the pandemic right now, in the middle of the pandemic. And so you could wonder why you're launching a product like that in the pandemic. Well, we think it's a good time to launch it because we can actually put it out there and start experimenting with it and optimizing it. And it may not be a huge revenue driver yet in the very near term. And when we get out of the pandemic, we think that's a big opportunity. If you start multiplying some of the big user numbers that we have, the large number of searches we have for relatively large tickets and multiply that even with a very modest, small percentage, you quickly get into a pretty sizable opportunity for TripAdvisor. So excited, unproven to the extent that we are just rolling this out a little bit more proven by other players that have rolled out similar subscription services and have been very successful at it. So we're -- it's not going to be far off the moment that we launch it, and we're optimistic about what we can do in the years to come.

That's interesting. All right. On the auction side of the business, on the third quarter earnings call, you noted that the effective take rate, if you will, actually reached closer to pre-pandemic levels, during certain periods of recovery. One of the concerns, clearly, the investment community has is the monetization will lag since the competition in the auction marketplace might be low. But clearly, you guys saw that reached pre-pandemic leverage during certain periods. What is driving that trend? And do you -- how do you think about potential competition on the auction marketplace in 2021 when demand recovers post vaccine?

Yes. Yes. We saw the auction, actually, recover quite nicely between April, the depth of the pandemic, up to in the third quarter. And as I called out, and you say here, Deepak, is we actually saw sort of the bidding levels of our partners in terms of how much they are willing to pay per booking start to stabilize. CPCs started to increase in that time period. Volume increased in the time period. So volume and CPC is still lower than the year before, but improving in that time frame. We look forward, and we're actually pretty optimistic about this part of the business, the beauty of our sort of ad-based offering, the CPC offering, the click-based auction. Is that it can actually be a leading indicator of travels recovery, right? Because the majority of the offering is driven by consumer clicks at the moment that they are actually interested in a booking, sometimes months in advance of the actual trip. So we recognize the revenue of the moment that people actually click, where an OTA may only recognize the revenue when the actual trip gets done. So we think actually, we are going to be benefit potentially from being a little bit of an early indicator with the auction, actually, of the recovery. We have already seen that on our auction that sort of a market increase recently in sort of further out, 180 days out, type of searches. So clearly, consumers are starting to anticipate the end of all of this. And so it may well be that we actually -- as that becomes clear to consumers, we may actually well benefit it in the beginning half of next year with the auction as people are starting to book or research and book trips for the second half of the year, which is a revenue recognition for us in the first half of the year.

That's interesting. Yes, that's a very -- interesting commentary. Okay. And then sticking with the hotel business, what are your current thoughts on maybe pushing products for hotel direct or direct bookings at this time when the demand is relatively reset? Because historically, I mean, you always kind of try to find a good opportunity to balance those with the auction marketplace. What are your current thoughts on thinking about that, pushing those things more aggressively?

Yes. You will have seen that we've launched -- just recently launched 2 products on the B2B side, Spotlight Reputation Pro, which we're excited about and is a refresh of the offering that we have for hotels. And ways for these businesses to rebuild traveler confidence, to attract new customers, and to manage their reputation on TripAdvisor and other platforms. And so we think that's a nice additional offering that we have, which we're optimistic about. Of course, some of the subscription services that I am talking about are also going to help hotels more directly to partner with us to profile themselves favorably compared to others. And so we think as the market recovers, we will continue -- we have, I think the new irons in the fire, and we'll continue to focus on giving hoteliers an opportunity to profile themselves better on TripAdvisor. And help them and help us in the process. And so definitely a focus. And more broadly, as you know, we've had a strong focus in the hotel -- our hotel business within our Hotel, Media & Platform segment to grow the nonauction revenue. It's very important to us. The auction piece of the revenue is one where we think over the longer term, there's more pressure and less opportunity to fully control our own destiny. And so it's -- with the Google pressures, with competition and things like that. And so very, very focused on driving these other revenue streams. And while the pandemic was raging, and after we got cost savings out of the way and got -- and got our funding in a good place. That's what we've internally been focused on is like, how can we continue? When we come out of this pandemic, how can we hit the ground running with new offerings?

Before we kind of go into the cost savings side, maybe elaborate a little bit on what do you think the right monetization model will be? I agree that some of these are still in early days, Reputation Pro and products like those. But are these going to be some form of like a advertising monetization model? Or are you thinking about something like a subscription for here as well? What will be the right monetization model?

Yes. They're subscription-based. And we've had a subscription business, as you know, it's something we call Business Advantage, which has been the more basic advertising on TripAdvisor on a subscription basis, like your banner as a hotel on TripAdvisor, in which you can provide some additional information that you want to have. That's been a stable cut that we've had. A product that is very well penetrated in the hotel market. So as a product itself doesn't have a lot of growth left. And that's why we keep introducing these new products to keep growth in this marketplace. B2B hotel, B2B Services was a double-digit grower for us in 2019. And so despite the fact that we have a fairly stable sort of based subscription business, we're adding on new products. The big product that we added on in '18 and '19 was our sponsored placement product, which is more of an effort -- less -- it's sort of a hybrid between subscription and advertising because people pay us a monthly budget that we can then spend for them. But that's been a very attractive product, a way for hotels to appear at the top of the sort with a sponsored placement and therefore, attract a lot more traffic in times that they really would like to have it in, when they're low capacity, for instance. So that was a big product in '18/'19. Spotlight Reputation Pro are the products really now that we're launching in 2020 for growth going forward. And we're going to be looking at potentially more products to add to the suite. We have a pretty unique position. We have a strong sales force. We cover a lot of hotels. The chains, of course, but also to a lot of independent hotels. And we have this opportunity to continue to be relevant for them and continue to offer these more B2B services. And have them help them to tap into the massive set of information and data that we have and help them be better marketers on TripAdvisor as a result and even outside of TripAdvisor because we have a more omnichannel outreach even with Reputation in Pro.

Got it. Okay. A couple of questions on the cost savings side. Fixed cost reduction was pretty significant this year. And as we think about kind of demand recovery, are there areas of the business where you will have to reinvest and bring back some of these fixed costs? Or do you feel like you're at a pretty good run rate now until maybe a few years from here?

Yes. We obviously made some big changes this year. We're saving $200 million plus in 2020 on our fixed and discretionary cost base versus 2019. Obviously, if you include our variable cost, paid marketing and online paid marketing and credit card fees and other COGS, we're saving a lot more. But if you look at just like fixed and discretionary, we saved more than $200 million versus 2019. Now we think the majority of those savings, we can just have persist. As many companies find, and as we found is if you are forced to make cuts like we have been forced in the environment, you actually find out that you become more efficient, right? You find out that you can be more targeted in how you spend, you can find a more efficient way of operating. We've done that. Some of that will stick. The majority of that will stick. But we are also likely to reinvest at least some of the savings into some new business areas, such as our consumer subscription. We might make some targeted additions back to as the market recovers. We have some costs that naturally come back like operating our facilities and things like that as well. So some add back cost, but we think we can operate in a much more cost-effective way because of the savings that we have done, not everything has to come back. The majority will be savings. And so we'll add back some costs, but we'll find ourselves with a more efficient P&L as we enter and go forward, which is a huge advantage, right? Because now as we recover, by the time we get back to the same level of revenue in 2019, we'll do that with a lower cost base, we believe it will be more profitable.

No -- yes, that's significant. Okay. On the variable cost side, marketing is obviously a big part of that spend. What levels do you think it would make sense to kind of explore some of the paid marketing areas that you were thinking about before? And even brand as we rebrand from the current levels?

Yes. On the -- the truly variable side on the paid marketing on the SEM spend and sort of Facebook spend, that is -- we see that as a pretty variable expense. We have return targets that we set, and we actually maintain them as we entered into this in 2020. And so in 2020, what you've seen more or less as those costs come down with revenue. And we expect those costs to actually to go up with revenue again proportionally when we go back. So we don't have any plans to do more or less than that. And so just continue with that. And on the brand side, which was a sizable investment in 2018 and in the early half of 2019. Yes, I don't plan on bringing a significant brand spend back in 2020. One, maybe that is something for the longer term. But we don't believe we need that level of investment to benefit from the recovery in the near term. Where we have, even in 2020, made brand investments and we'll continue to do in 2021, is on the LaFourchette side, TheFork side, especially in the third quarter when we saw the strong recovery. We've been spending on television on TheFork in Europe. And that's sort of the quasi variable cost for us because we have very direct response rate between ads we put on television for TheFork and the bookings we see. And so we've been making investments like that. So going forward, hey, could we go back with more branded marketing, especially on the back of sort of a very successful rollout of subscription? Yes, maybe, but I wouldn't expect that near term.

Got it. Great. With that, we're out of time. Thank you so much, Ernst. Really appreciate it and look forward to talking to you soon.

Thank you very much, Deepak.

Okay.