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

Good morning, good afternoon, good evening, wherever you are. Thank you for joining us. Today is day 3 of the Morgan Stanley 2021 Virtual TMT Conference. We're thrilled to have you who're with us. So always been productive the first couple of days and that the last couple of days will be just as productive. We're really happy we have Ernst Teunissen from TripAdvisor with us today to talk through all the ins and outs that are going on in travel. It's been a very unexpected 2020, and now there's a lot of evolving dynamics in the industry and at TripAdvisor. So Ernst, it's always great to sit down, even if it's digitally, and sort of get the state of the state. Thanks for joining us.

Thanks, Brian, for having me again, be it virtual, and pleasure to be here and love to talk about where we are today.

Great. We'll have a series of questions that Ernst and I are going to sort of talk through. [Operator Instructions] Before we get started, the disclosures -- for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Some of the statements that TripAdvisor will make today may be considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Any of the forward-looking statements that TripAdvisor makes are based on assumptions as of today, and TripAdvisor undertakes no obligations to update them. Please refer to TripAdvisor's Form 10-K for a discussion of the risk factors that may impact actual results.

Ernst, you've been at TripAdvisor since 2015. And before that, you were at Cimpress. Even before that, I think you were also on the investment banking side at certain banks. And it's always good to have you. Before we sort of get started, I wanted to sort of give you the for just sort of talk about the latest going on at TripAdvisor and some of the key trends on your mind to sort of start the conversation.

Yes. Thanks for that, Brian. Yes, you were mentioning in your intro, it was an unexpected 2020. It was definitely a tough 2020 for the industry and the travel industry and for our business. Not quite out of the woods yet, but we're looking at 2021 and beyond with quite a bit of optimism right now. I just want to run through why that is and how we're thinking about things before we go into Q&A. First of all, there's great potential for a strong recovery in travel ahead of us. Obviously, uncertainty remains. There has been unevenness in Q4, and that was expected and planned for. And -- but the vaccination development's underway are very, very encouraging. All the news flows since November, the President yesterday saying that there will be enough vaccines in place by the end of May in the United States for every adult, those are -- it seems to be going well. And that is a very important indicator because we believe that when the vaccines are in place and if that happens on the timetable that we're talking about, there is going to be significant backlog in travel, pent-up demand in travel, broadly -- in spending patterns more broadly. And I think you guys have been talking to yourselves about the pent-up savings levels in the United States, $1.5 trillion. But we just see on our own site that the pent-up demand is there. Even in the pandemic, we had still about 60% of the volume in the fourth quarter of people looking at our site that were there before, looking ahead, looking where they could go thereafter. We've seen actually that tick up more recently. More people are looking ahead towards their next vacation. So we think there's quite a bit of pent-up demand, and that puts us in a good spot with some optimism for 2021. The other thing that puts -- we believe puts us in a good spot is that we took care of a few things that were really within our control in 2020. Obviously, a lot was not in our control. But a few things were in our control. Most importantly, our cost position. We took out quite a significant amount of fixed cost out of our business to the tune of more than $200 million in 2020 versus 2019 and even more in variable cost. But that fixed cost, we are going to reinvest only very prudently, only in a very limited way. We want the majority of those savings to actually stick, and we think they can stick. And we're looking forward to coming out of this pandemic with a much more efficient P&L and able to reach much more operating level when we get back to the same revenue levels. So that's one thing. And then the other thing is we took the opportunity to continue to work on our products, continue to work on our offering across the board. And importantly, a number of new product introductions that we did last year on the B2B side, hotel subscription side, and of course, on the consumer side, direct-to-consumer with TripAdvisor Plus that we launched in December at our beta launching. And so that makes us feel good. It feels that we have not only be coming out leaner but also with a better set of opportunities going forward. And so that adds to our business with multiple revenue streams and multiple items in the fire of significant growth and ability to capture the upside now that we're coming out of this tough year.

That's great. No, it's a good way to sort of to start, just to sort of get the overview because there's a lot going on in the industry and in the overall economy that impacts you. I mean you mentioned sort of the excess savings and the health of the U.S. consumer. We agree with that. I mean we think $1.5 trillion of excess savings, sector even maybe headed to $2 trillion. So the dollars are there. You guys are in a very unique position at the top of the funnel in the travel search process. So I would be curious to hear about what are you seeing as sort of early signs or indications of travel demand coming back as we think about second half of '21, et cetera.

Yes. You're right. We have a unique vantage point. We were the largest travel platform in terms of monthly unique users before the pandemic happened. And actually, throughout 2020, we maintained that position. One of the things that we have been seeing is that consumers planning trips out 90 days plus has actually grown more recently since December, up 50% from where the levels were in December. And so we are really seeing strong indication of strengthening interest in planning for your vacation in 2021. We see that in terms of traffic patterns, but we also have seen that in the many surveys that we do under our base where, even in 2020, people were reporting that they were looking ahead. But that is now elevating and people are talking about making multiple trips, international trips. And more than half of the global consumers that we are interviewing are saying that they are spending times -- have spent time during the pandemic, and then 3/4, we'll say that will even spend more time now planning their trip. And so you see this increment of momentum behind people seeing the light at the end of the tunnel and wanting to reengage and what we can say. And as we said before, the vaccine is going to be a huge help in that in our estimate.

Interesting. I mean, because one of the things that we've also been sort of wrestling with and trying to honestly figure, I don't think we know the answer yet, but curious for your perspective. So across a lot of categories of consumer Internet, we've seen a 2- to, in some cases, 3-year pull-forward in digital adoption. It's true in e-commerce. It's true in video. It's true in real estate. It's true across a lot of categories. So I guess the thing we're trying to figure out is, is that going to happen in travel. And so as you're seeing these early signs and green shoots coming back, are you seeing evidence of new people coming to the platform who weren't there previously? So maybe we do see just a further shift of more people moving online and booking online.

Large parts of travel have moved online, but there's still a lot of off-line booking in travel. One of the categories that we are, as you know, super focused on various strategies to us is Experiences and Restaurants, and then dining. Experiences, before the pandemic started, was still 18% off-line bookings there. So there was a secular opportunity even with or without the acceleration in the pandemic. But yes, if you would were to extrapolate some of those e-commerce adoption trends that we saw -- see in 2020 to that category when the market starts to come back, that might be -- we might be helped by that. Restaurant bookings in Europe, where we are -- where we skew very strongly, was behind the United States before the pandemic in terms of online booking adoption. If the pandemic is resulting in better adoption, that's another category where we could benefit.

Got it. Okay. I want to ask just a couple about the quarterly cadence of the model. And so we're sort of thinking about the year with all the moving pieces. Maybe talk to us about sort of the way the investors should think about the quarterly cadence of both the top and the bottom line of the model this year as we sort of go throughout the different phases of the recovery.

Yes. So point predictions are, of course, very tough at the moment, right? We've seen February definitely better than the start in January, which is really encouraging. We said on our earnings call that we see Q1 sort of roughly in line with what we had seen in Q4. And I think there's material improvements coming, especially with the vaccine rollout. And so we're looking at the second half of the year, in particular, there being able to benefit from it. Nothing has been sort of normal about the pandemic's impact on our industry and in terms of seasonality that may be disrupted. The normal seasonal pattern may be disrupted until we're back to a truly post-COVID, post-pandemic period. And so there is going to be some unclarity on the quarterly movements this year from that perspective. But the larger trend that we expect is vaccine being rolled out on schedule, and therefore, a real opportunity for a much more significant recovery of the travel sector in the back half of the year.

Got it. And you do have multiple products and segments rolling across the overall business. Maybe talk to us about which areas of the business are sort of leading the recovery, whether it's hotels, alternative accommodations, restaurants, et cetera, versus the ones that are lagging, just so we can sort of think about the puts and takes, not only top line drivers but the margin profile.

Yes. What we saw in 2020 in the period of the -- darkest period of the pandemic and some of the partial recoveries of the pandemic in 2020 was that, for us, leading the pack were rentals and restaurants. And so we saw that our restaurant business or the core business, in particular, was very elastic to restaurants being reopened again. And so after a period of being -- restaurants being shut down in Europe in the early stages, there was a reopening in the summer. And our Fork business basically shot back to the 2019 levels in August, September. In some markets, like Italy, we're actually ahead of 2019 in that period of time. And not surprisingly, when the restaurants were shut down again, that came down again in the fourth quarter, but a fairly direct response to it just being available. Other parts of the business have been slower to recover in partial recoveries. Experiences is an example that was slower to recover. Maybe not surprising. It's something you do in groups in close proximity, and distancing may be a little bit more difficult and has been slower to come back. We think -- and so there will be differences in patterns as we come out of this recovery as well. But we expect all these categories, including our hotel category, including our media category, to all benefit now from this reopening of the market.

Got it. Digging into a couple of those segments on the Experience side and the Hotel Media side a little bit before I get to TripAdvisor Plus. On Experiences & Dining, I know in the past, you've outlined sort of an invest-for-growth focus is sort of how do I think about that segment. So is that still the way you're thinking about Experiences & Dining as we go into '21, '22? Is it still sort of invest to kind of keep the growth going?

Absolutely. Experiences & Dining, super strategic area for us, has been an area of growth for the business and a focus because we believe have such a strong competitive position in that -- in those sectors, and they have such a big TAM to tap into. I talk a little bit about it when we talk about Experiences, but Experiences as a category, 80% still off-line, big category. We play that with a huge supply aggregation that we've done under Viator. We have a global reach and supplier on Experiences second to none. We played that with 2 brands: one, a more pure-play OTA brand, which is Viator; and one, TripAdvisor, which has an opportunity to offer Experiences in a much more integrated way in your total travel. We think that combination is a very strong combination. And we believe we have ample of runway there to benefit from the marketplace and from our strong competitive position and continue on the path maybe even stronger post pandemic than we were before. Dining, it has been an exciting area for us that we continue to focus on. TheFork, which is the largest part of our dining business, is a player with a strong position in Europe. Was Continental Europe before the end of 2019, but through an acquisition of a company called Bookatable, we now have a truly pan-European presence as well South America as well as Australia. And that has been a strongly growing business because there's a lot of off-line to online movement there. And then we play dining also on the TripAdvisor side, where we have started to sell from 1.5 years ago B2B products to restaurants that are listed on TripAdvisor. And that has been a nicely growing sector as well. And we reinforced that with an acquisition, a company called SinglePlatform, at the end of 2019 as well. So we have the building blocks in place there and the opportunity to keep growing in those areas. And sort of other growth areas that we've had in the portfolio have been in our hotel media platform segment. Our hotel B2B business, I referenced that we introduced 2 new products on the hotel B2B side only at the end of last year. We think that sector has a lot of runway and has been a source of growth for us in the past. And we've said on numerous occasions that we -- before the pandemic that we felt that the media opportunity was under-indexed on TripAdvisor as well. So all those areas will be continued focus as we come out of the pandemic for us.

The Experiences point, you mentioned how low online adoption is within Experiences. And there's a lot of players in the industry who are trying to go after this opportunity. So I guess, let me ask you that from your perspective, one, why do you think online adoption has been so slow in that category? And what is sort of the key consumer unlock that you need to really get right to bring that consumer behavior in those wallets online around in travel experiences?

It has really been availability, and that's what platforms like ours have been doing is getting more of these fragmented suppliers online, able to transact online. We made an acquisition of a company called Bokun 2 years ago, which is a provider of e-commerce capabilities for these suppliers help them actually get online. And so the large push was getting these small suppliers online, something that happened in the hotel industry some time ago but is really where this industry is not growing, getting more of them online, getting more of the capability to transact online, where historically, it was more people phone them more or just [ queued in ] line outside of the attraction. And so that's been the development, and we have been stimulating and growing that. And with that an increased awareness of consumers, but that is actually something they can do. They can book these experiences online and get the convenience of not having to stand in line with the uncertainty that you can go there and being able to plan in advance. And so making that available is the key to unlock the off-line to online conversion.

Understood. All right. Let's talk to TripAdvisor Plus. I guess a lot of questions on this. The first one is just talk to us about the overall vision for the product offering. And why is now the right time to really launch this and take this to market?

Sure. Well, it's no secret, of course, that hundreds of millions of consumers have chosen their preferred subscription services across categories like music, online shopping, video contact -- content. Take Amazon Prime, of course, started with simple shipping fee avoidance, and then it's morphed into something over time, bringing more and more value to consumers. We believe that TripAdvisor Plus can fill the notable void of an affordable high-value subscription offering in travel, giving consumers more reason to join TripAdvisor and deliver travelers compelling value in a new way. And so what we have -- we are beta launching this. Today Plus subscribers could access deals and perks across more than 100,000 hotels already as well as exclusive savings on hundreds of thousands of bookable experiences. But like Amazon Prime, over time, we envision adding more and more services and benefits to that platform, the amenities in destination and travel benefits, airline-related perks, people -- probably travel support, member-only content, exclusive availability to do certain things. So we have the vision for the product is to -- for it to be a way of traveling better, driving smarter for the consumer even if it starts in this beta launch that we're doing today with a focus on a discount and perks. So that's the vision for it. You're asking why launch this now. It comes on the back of a shift that we have been making as TripAdvisor that we talked about to a more consumer-oriented view from a less of a vertical by vertical to a more consumer-oriented view around TripAdvisor. How can we help a consumer plan the best overall trip possible, especially when that is a more complicated trip or more involved trip to plan? That's our sweet spot. And from that thinking, from getting some executives in that we're focused on that, experience with that. From the thinking -- more consumer-centric thinking came, how can we add more value to the consumer on a more overall level? Plus came out of that. We've been thinking about that for a while. An obvious question is why would you roll that out now in a pandemic. But -- and because we're rolling it out at the end of the pandemic, we have measured expectations for 2021. We're being very methodical on how we roll this out. We're in beta. We're going to roll this out progressively. We know that building a strong subscription business takes time, but we're excited to get started because we -- and we've talked about this, we think that the potential size of this, the prize of this if we get this right is very substantial over time. And so we're putting all the focus and attention and priority to that as we start 2021.

You mentioned sort of a measured approach throughout '21 now. Not asking for like the quarterly run rates and everything else, but as you think throughout '21 and '22, what are sort of the key KPIs or the key metrics that investors should be asking you to, to kind of like ensure that the business is tracking along as well as it should be?

Multiple dimensions. We're in beta right now. It's early. We are offering perks and discounts across the world, but the audience that sees it is at the moment, U.S. only, and it's a partial in the U.S. So it's a slice of it that sees it. And we do that because we want to be methodical. We want to hone the product before launching it to across the whole platform in the United States. So that's stage 1: rolling it out -- completing the beta, rolling it out across, and then ultimately, rolling it out to all markets in the world. We're taking a methodical approach where we want to obviously get this right. We want to iron out the kinks as we go along. At the same time, on the supply side, we are busy signing up more and more hotels, not just with discounts but also with perks. We've been using some aggregators to give us early larger volumes, but the vision is for long term to have direct connections to -- access to perks with hotels. We have our own Experiences base, of course, that we can offer. And so we're honing the product, we're honing the availability of it so that it becomes a great experience then fully roll out.

Got it. And I guess, it's interesting because the platform has pivoted a few times over the years, and so the business model sort of changed. I think pre-pandemic, you had 400 million monthly active users on the platform monetized through a few different means. So maybe talk to us about 2022, like if TripAdvisor Plus rolls out, how do we think about the monetization and the margin profile of the TripAdvisor Plus subs versus the non-TripAdvisor Plus subs and sort of the massive audience you have on the platform?

Yes. So if you think about the market opportunity, there's a number of ways to think about the potential. You said, is it the 400 million users? Yes, that's a starting point. But you could -- the TAM is actually everyone that makes at least one vacation a year and spends north of $750,000 on vacation each year. That's a -- it's a big market. And so if you think about that, how many people would that be? And could that lead to the types of subscribers that you see with other gold standard subscriptions in other industries? Another way of looking at it is, how many high-value searches does TripAdvisor have? One piece of data we put out in our earnings release was in 2019, we had 160 million hotel clicks with value of 750-plus measured in because they do a search over a certain number of days and a certain hotel type of certain value. That's a big number. And so you can take a percentage of that. But that's not the only addressable market within our platform either because there are users that piece a vacation together in different means, and they are addressing because they spend a lot of money as well. We have more than 100 million engaged members already. We have, pre-pandemic, more than 400 million unique users in 2019. And so if you take all those big numbers and assume that we can convert only a limited number of them into, we think it's a pretty no-brainer proposition for folks. You get to significant numbers, and that's why we put out there that our ambition is to get to tens of millions of subscribers over time. And this could be a multibillion-dollar opportunity for us. Again, we're in beta now. We're rolling this out new product gradually, and so we have measured expectations for the near term. It takes time to build this, but this could have a significant -- presents a significant opportunity for us.

Okay. A 2-part question on marketing spend. One, do you foresee spending on marketing around TripAdvisor Plus to sort of get that brand and that product out there? And then 2 outside TripAdvisor Plus. It's interesting. We've seen a lot of changes in the online travel space with the OTAs pulling back on some ad spend, et cetera. Just how are you sort of thinking about philosophically going forward performance marketing and brand marketing ex the TripAdvisor Plus launch?

So in our main business, you're not talking about Plus here. Let's talk about sort of cost more broadly first. I mentioned upfront, you say $200 million plus of headcount-related and discretionary costs and more so on an annualized basis and even more if you include these variable cost savings. We expect the majority of the fixed cost savings that we did and we said this will stick in 2021. Now let's look at the variable costs. They came down mostly in 2020 with revenue. And we more or less expect them to come back with volume in the business as well and support the growth that we have in those businesses and support the focus that we have on driving more durable direct relationship with consumer, which is ultimately the objective that we have with initiatives like Plus, with the initiatives look like better positioning on your considered trip. But [ marketing will continue to pay on that ].

Got it. Okay. Last one I had is on alternative accommodations. There's a lot of discussion in the industry about the future of alternative accommodations. It sounds like demand has been sort of pulled forward and user adoption has been pulled forward alternative accommodations. I want to be curious to hear if you agree with that and if you're seeing that with your own alternative accommodations product. And then just talk about sort of the long-term positioning of TripAdvisor within the alternative accommodations complex.

Yes. We also saw in the midst of the pandemic that alternative accommodation had a leg up because people were looking closer to home. They were going to drive somewhere, and not all hotels were available, et cetera. And so there was definitely a trend there. There will be -- like many of those shifts that we saw in 2020, there will be some converting to the mean, and hotels will become more popular. People will fly again to their destinations. And so there's some reversion to mean. Our platform is, as you know, pretty broad. And so we were able to benefit from the temporary shift to shorter nearby trips in rentals. And we have a pretty global portfolio were representing no different verticals. And so whatever shape the recovery will bring in 2021, we have the product portfolio to address that. So alternative is a strategic area for us. We've integrated that across our business. It gives consumers choice, not just hotels but also alternative accommodations. That's important to us, and we'll continue to build that. And it's entirely consistent with our vision for being a one TripAdvisor, helping you with your entire trip positioning, consumer-focused approach. We want to be able to offer hotels with alternative accommodations, experiences, lights, the whole package for our travelers.

All right. Well, Ernst, it is always a pleasure to sit down with you. Next year, hopefully, we'll all be traveling and we'll be seeing together again in San Francisco. But there's a lot going on. There's a lot of things in mind as to what the TripAdvisor Plus does.

Thank you, and thanks for inviting us and look forward to seeing you next year.

Thanks, Ernst. We'll talk soon. Thank you, everyone.