KEY POINTS
- BACKSTORY: Mgmt started the year with the right frame of mind (revenue maximization), but introduced a lot of noise into its story given the way it handled expectations this year. In turn, mgmt seemingly felt compelled to pivot on its 2017 objectives, but wound up shifting the short narrative from EBITDA miss to revenue shortfall in the process. TRIP optically validated that thesis with a soft 2Q revenue guide for its key segment during the JPM conference, even though we suspect most of that pressure came from its UI testing; mgmt suggested that headwind should be mostly confined to 2Q.
- THINKING THROUGH THE NOISE: Even though we are annoyed by the aforementioned pivot, we believe the new bear case narrative around a vacuum in demand is largely overblown since 1) TRIP should be able to fund the bulk if not all of the TV campaign with its revenue growth vs. cannibalizing its online ad budget, and 2) there will be some n/t return on that TV ad spend. Collectively that means TRIP could see increasing demand on an ad budget that could grow meaningfully in 2H. But that really depends on mgmt's current priorities, which we are trying to assess.
- WHO's AT THE HELM? Everything that we laid out in point 2 suggests that the TV campaign should be mostly additive to the total ad budget rather than cannibalistic. But that doesn't mean mgmt won't meaningfully pare back on online ad spend since we just don't know where its head is at. TRIP may be managing to n/t EBITDA, or taking a more measured approach to balancing revenue and EBITDA. But this isn't the year for that; time is not on its side. We're sitting into this print trying to assess the magnitude of any such pivot. We're hoping the malaise following the JPM conference set this this mgmt team straight; they had it right the first time.
BACKSTORY
Mgmt has introduced a lot of noise into its story this year. Mgmt started the year with a goal toward revenue maximization, which we bought into since it basically meant it was bringing the fight back to TRVG by reinvesting any incremental EBITDA growth back into marketing, in turn attacking whatever limited ad efficiency TRVG was generating off its ad spend.
However, because of the way TRIP initially announced its planned TV campaign (i.e. not explicitly factoring it into its EBITDA guide), it put itself in somewhat of a box since the sell-side wasn't factoring in any TV spend into their estimates. Mgmt in turn pivoted on the next print by announcing that it was going to fund the TV campaign by swapping out ad spend from less efficient online channels instead of bolting the TV spend on to its ad budget as planned, which we were less than pleased about.
In turn, the short narrative shifted from EBITDA miss to demand shortfall since TV advertising generally has a longer payback cycle than online channels. Ultimately the new bear case was optically validated given the soft 2Q guide below consensus for TRIP's key segment during the JPM conference. However, we suspect the source of the shortfall was mostly due to product testing around its new UI; mgmt suggested that headwind should be mostly confined to 2Q.
THINKING THROUGH THE NOISE
Even though we are annoyed by the aforementioned pivot, we believe the new bear case narrative around a vacuum in demand is largely overblown since 1) TRIP should be able to fund the bulk if not all of the TV campaign with its revenue growth vs. cannibalizing its online ad budget, and 2) there will be some n/t return on that TV ad spend. Collectively that means TRIP could see increasing demand on an ad budget that could grow meaningfully into 2H. Granted, that all depends on which mgmt team is at the helm (3rd bullet).
On the first point, remember that the revenue growth associated with deemphasizing IB has no cost attached to it, so that should all flow down to EBITDA. While the UI changes are currently stifling that upside, that headwind should be largely confined to 2Q (according to mgmt) while its TV spend will be concentrated in 2H17.
That said, TRIP could fund the bulk of its ~$75M TV budget in 2H17 on less than 50% CPC recapture, which isn't outside the realm of reason considering that US has already returned to pre-IB monetization levels (RPS) in 1Q and IB is now fully baked into the Int'l comps. If that were the case, the remainder of its TV budget should be covered by EBITDA growth from its non-hotel segment, which we expect to peak concurrently with its TV spend in 3Q.
Regarding the TV budget itself, a longer payback cycle ≠ zero n/t return. Even if mgmt was funding the TV campaign solely with budget sourced from less efficient online ad channels (see above), neither we or the bears can say with any certainty whether the n/t ROI profiles for the former is materially lower than the latter, especially since we don't know what the latter is (e.g. banner ads). FWIW, we've seen some encouraging signs in our Google Trends Index, which loosely suggests that traffic has picked up since the TV campaign went live.
WHO's AT THE HELM?
Everything that we laid out in point 2 suggests that the TV campaign should be mostly additive to the total ad budget rather than cannibalistic. But that doesn't mean mgmt won't meaningfully pare back on online ad spend since we just don't know where its head is at.
TRIP seemingly shifted its priorities in a matter of quarter, and we're now concerned that TRIP may be managing toward n/t EBITDA rather than revenue. Or maybe TRIP is trying to take a more measured approach to balancing both, but this isn't the year for that, not when TRVG is still advertising with reckless abandon, especially after already lapping TRIP in referral revenue.
Yes, TRIP may wind up appeasing myopic EBITDA expectations this year, but in doing so, it may allow TRVG to drive a considerable wedge b/w their respective ad budgets, which would ultimately inhibit TRIP's ability to effectively compete moving forward. For context, TRVG's ad spend lapped TRIP's referral revenue in 1Q, so TRIP doesn't have the luxury of time.
We're sitting into this print trying to assess the magnitude of any such pivot. We're hoping the malaise following the JPM conference set this this mgmt team straight; they had it right the first time.
Let us know if you have any questions or would like to discuss in more detail
Hesham Shaaban, CFA
Managing Director
@HedgeyeInternet
Todd Jordan
Managing Director
@HedgeyeSnakeye
Sean Jenkins
Associate
