KEY POINTS
- THE BACKSTORY: TRIP’s core business is CPC advertising, where TRIP’s clients (primarily OTAs) pay for preferential placement within TRIP’s metasearch results to steer users (via clicks) to their sites in hopes of driving travel bookings. But TRIP started wading into Instant Bookings (IB) with the hope of increasing its own monetization rates by moonlighting as an OTA. TRIP’s Click-Based & Transaction (CBT) Hotel revenue started declining shortly after, leading to the question of revenue parity, which is basically what level of Instant Booking conversion was necessary to offset the resulting declines of CPC ad revenue.
- WHAT REALLY HAPPENED? In order for IB to have been dilutive it had to be 1) dilutive on a standalone basis vs. CPC and 2) featured over CPC to some degree. The first part relates to the PCLN Instant Book relationship. According to both PCLN & EXPE, meta is a limited to zero-margin channel, which means they are effectively bidding away their take to TRIP. The problem with the PCLN IB relationship is that all PCLN could offer TRIP was some percentage of that take, but TRIP had to go farther down the funnel to get it with IB (conversion vs. ad click). Regarding the second part, we only need to review mgmt commentary to see that IB listings were getting preferential treatment in search results. As a result, TRIP posted disappointing quarterly earnings in 4 of the last 5 quarters.
- WHAT’S CHANGED: TRIP will start lapping the PCLN IB relationship in 4Q16, so TRIP should be operating off of a flat baseline from a comp perspective in 1Q17. But more importantly, it appears TRIP is starting to downplay IB's presence in desktop search results. If so, Revenue per Hotel Shopper (aka APRU) should start reverting back to pre-IB levels (i.e. CPC) since TRIP’s CBT revenues are heavily concentrated on desktop (>80% by our estimates). In turn, that should translate to growth off a depressed 2016 comp that was dragged down by IB. Mobile could be a bit of a drag since TRIP appears to be stuffing its App feed with IB inventory, but to a lesser extent since App traffic is only 25% of TRIP’s total traffic (half of mobile) and monetizes at a fraction of CPC, so it could be less dilutive to press here.
- WHAT WE’RE CONCERNED WITH: 1) Traffic and 2) TRVG. We estimate that desktop declined y/y by low-to-mid single digits in 3Q16, but suspect TRIP should be able recapture some traffic back from TRVG given its plan to increase its 2017 marketing budget, which is basically what has driven TRVG’s outperformance over the L9M (see our TRVG deck). TRVG is less of a fundamental concern than it is around timing. TRVG’s 4Q results point to another quarter of accelerating revenue growth in 4Q16; we believe at least part of TRVG’s success over 2016 has come from TRIP’s IB woes, so its 4Q acceleration suggests TRIP’s IB issues could be lingering and that we could be early. Or we could be overthinking it since TRVG was working off a light comp in 4Q16, and meta is a relatively smaller portion of the collective marketing budgets for PCLN & EXPE.
- WHAT WE’RE PLAYING FOR: We’re trying to get in front of what we believe will be a fundamental inflection in the story once TRIP returns to revenue growth in Hotel CBT, which we expect to come as early as 4Q16, if not 1Q17. If so, none of us will really know whether it’s CPC or IB that’s actually working (mgmt will likely say both if directly asked), so the street will likely assume that IB is catching on, or at minimum that it is no longer cannibalistic (Please do not forward this note). In turn, we expect sentiment to swing on the heels of what we suspect will be a big upgrade cycle (sell-side is 90% hold/sell rated), with the buy-side following suit since nothing else in Internet is really working this year (even the stuff that is working). Bottom line, the risk reward appears favorable to us, stock is 10% from its 2-yr lows, and 84% off its 2-yr highs, so if the inflection doesn’t emerge on Wednesday's release/ Thursday's conf call, we are willing to stick it out for the next 6 months.
THE BACKSTORY
TRIP’s core business is CPC advertising, where TRIP’s clients (primarily OTAs) pay for preferential placement within TRIP’s metasearch results in order to steer users (via clicks) to their sites in hopes of driving travel bookings. Starting in 2H15, TRIP started wading into Instant Bookings (IB); the goal was to try to convert its user traffic in hotel bookings directly on its own site in hopes of improving its monetization rates vs. its CPC model where it redirects that traffic via ad clicks to its clients. However, TRIP’s Click-Based & Transaction (CBT) Hotel revenue started declining shortly after, leading to the question of revenue parity, which is basically what level of Instant Booking conversion was necessary to offset the resulting declines CPC ad revenue.
WHAT REALLY HAPPENED?
In order for Instant Bookings (IB) to have been dilutive it had to be 1) dilutive on a standalone basis vs. CPC and 2) featured over CPC to some degree. Regarding the first part, Instant Book in itself isn’t necessarily dilutive, but we suspect the PCLN IB relationship was the issue.
Both EXPE and PCLN have each implied that metasearch is a limited to zero-margin bookings channel, which means that TRIP basically was already getting the bulk if not all of the OTA take through its CPC product. In essence, TRIP was already in the OTA bookings business from a monetization standpoint.
The problem with the PCLN IB relationship is that all PCLN could offer TRIP was some percentage of its take, which TRIP was basically already getting in full via CPC, but with IB it had to go farther down the funnel to get it (conversion vs. ad click). Regarding the second part, we only need to review mgmt commentary to see that IB listings were getting preferential treatment in search results. In short, we estimate that the combination of 1) and 2) is what led to its declining Click-Based & Transaction (CBT) Hotel revenue.
WHAT’S CHANGED
TRIP will start lapping the PCLN IB relationship in 4Q16, so TRIP should be operating off of a flat baseline from a comp perspective in 1Q17. But more importantly, it appears TRIP is starting to deemphasize IB in desktop search results, which mgmt had loosely spoken to. Anecdotally, we’re seeing very few IB listings on the desktop platform; almost as if TRIP has shut IB off. If so, Revenue per Hotel Shopper (aka APRU) should start reverting back to pre-IB (i.e. CPC) levels since TRIP’s CBT revenues are heavily concentrated on desktop (>80% by our estimates). In turn, that should translate to growth off a depressed 2016 comp that was dragged down by IB. But TRIP doesn’t need to recapture all of the ARPU it lost from its IB rollout to beat estimates over the next 2-3 quarters; anything over 50% recapture will get TRIP above consensus over the next two quarters.
Mobile could be a bit of a drag since TRIP appears to be stuffing its App feed with IB results. But App traffic is only 25% of TRIP’s total traffic (half of mobile), so relatively less of a drag. Further, mobile users monetize at roughly 30% the rate of desktop, so it won’t be as much of a risk/drag in terms of CPC cannibalization. But given that at least 20% of Mobile IB bookings come from repeat users (20% from vaulted credit cards), there’s a chance TRIP may find better success with IB in the app, especially since it now has EXPE’s inventory to work with.
WHAT WE’RE CONCERNED WITH
1) Traffic and 2) TRVG. Regarding traffic, we estimate that desktop declined y/y by low-to-mid single digits in 3Q16. We suspect TRIP should be able recapture some traffic back from TRVG given its plan to increase its 2017 marketing budget, which would seem like a relatively weak reason to believe traffic trends should improve until you consider that advertising has been the primary driver behind TRVG’s recent surge traffic/revenue (TRVG pays away nearly all its revenue in traffic acquisition costs). At a minimum, we expect TRIP to stop the bleeding if not reclaim traffic from TRVG.
TRVG is more of a concern around timing than anything else. TRVG’s 4Q results point to another quarter of accelerating revenue growth, and we believe at least part of TRVG’s success over 2016 has come from TRIP’s IB woes (i.e. excess meta marketing budget for PCLN & EXPE given TRIP’s CPC declines). The fact that TRVG’s success has carried into 4Q suggests TRIP’s IB issues could be lingering and that we could be early; or that we’re overthinking it given that meta is a relatively smaller portion of collective marketing budgets for PCLN & EXPE.
WHAT WE’RE PLAYING FOR
We’re trying to get in front of what we believe will be a fundamental inflection in the story once TRIP returns to revenue growth in Hotel CBT, which we expect to come as early as 4Q16, but if not, 1Q17. Granted, consensus is already looking for an acceleration in revenue growth over the next four quarters (as they have been leading into every print since TRIP’s IB woes began), but TRIP only needs to capture a fraction of what was lost.
If we're right, none of us one will really know whether it’s CPC or IB that’s actually working (mgmt will likely say both if directly asked), so the street will likely assume that IB is catching on, or at minimum that it is no longer cannibalistic. In turn, we expect sentiment to swing on the heels of what we suspect will be a big upgrade cycle (sell-side is 90% hold/sell rated) Further, we expect the buy-side will follow suit following what has been a fairly tepid Internet earnings season (even the names that are working aren’t working). We expect a recovery story with $7B in cap amongst a dearth of actionable long ideas should draw some interest.
But if we're wrong on timing, or worse our thesis, we suspect the downside is somewhat bounded by TRIP's 52-wk low (-10% from here). If Thursday disappoints, we’ll be playing for the next quarter or two, which is plenty of time for the inflection catalyst to emerge.
Let us know if you have questions, or would like to discuss in more detail.
Hesham Shaaban, CFA
Managing Director
@HedgeyeInternet
