Growth is a good goal for a business to have, but only to the extent that it leads to sustainable profits. TripAdvisor (NASDAQ: TRIP) on Thursday revealed mixed fourth-quarter earnings results that showed its struggle with that trade-off. The good news is that profitability shot higher for its core hotel segment following six quarters of declines.
However, the company had to accept a slower growth pace in exchange for the improved profit margin. TripAdvisor's 2018 outlook implies that the management team is willing to make the same bet over the coming quarters, too.
Let's take a closer look at the results.
What happened this quarter?
Revenue ticked up by 2% as big gains in the non-hotel division completely offset a decline in the core hotel business.
Highlights of the quarter included:
- The hotel business reported lower sales and a 5% decline in adjusted profits, year over year. Yet profitability improved to 26% of sales compared to 16% in the prior quarter.
- Click-based and transaction revenue fell 11% in the hotel segment, and revenue per shopper fell by 14%.
- Direct advertising and marketing dove to its lowest point in over a year as TripAdvisor tweaked its campaigns to focus spending on the highest return on investment. As a result, hotel shopper traffic growth slowed to 3% from 7% in the prior quarter.
- The non-hotel segment kept expanding at a healthy pace, with revenue rising 20% as the portfolio of bookable activities rose to 83,000 from 56,000 a year ago.
What management had to say
In prepared remarks issued with the earnings report, executives said they were happy with progress they made at arresting the two-year slide in profitability at the hotel segment. They credited a more stable advertising market for the success, along with moves aimed at reducing traffic acquisition costs. Together, these trends "mitigate[ed] year-over-year adjusted [earnings] declines in our hotel segment," management explained, despite the extra costs associated with TripAdvisor's national television ad campaign.
The improved profitability came at a cost, though. "Preserving hotel segment profit has come with near-term trade-offs in terms of hotel shopper growth and click-based revenue growth," management said. Both metrics worsened during the quarter.
That trade-off is appealing to CEO Steve Kaufer and his team, as their initial forecast for 2018 implies more of the same types of profit-for-growth exchanges ahead. Specifically, TripAdvisor is calling for a shrinking hotel segment this year in the context of roughly steady earnings.
The non-hotel business should continue expanding at about the same 20% rate investors have seen in each of the last two years. But the big takeaway from this report is that TripAdvisor executives have shifted their thinking on their core hotel business. Calling the profit declines of the past few years "unsatisfactory," they're choosing to focus on improving the financial strength of the division -- even if that means accepting a reduced growth profile.
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