TripAdvisor Struggles on Hotel Weakness

It's always hard for a company to reinvent itself, and TripAdvisor (NASDAQ: TRIP) has made a big strategic shift that it found necessary in order to survive in a changing environment in the online travel segment. Many investors have been less than certain about TripAdvisor's ability to stand up to much larger, longer-established players in online travel. Yet that hasn't stopped the company from aggressively moving toward challenging rivals directly by offering customers another way to book the travel services they want.

Coming into Monday's third-quarter financial report, TripAdvisor investors knew that the money that the company would need to invest in restructuring its business and finding growth would weigh on near-term earnings results, but they hoped to see solid gains on the top line. Unfortunately, TripAdvisor's revenue growth wasn't as strong as expected, and the hotel business has proven to be tough to crack for the travel service. Let's look more closely at how TripAdvisor did and what's coming next for the company.

TripAdvisor takes another fall

TripAdvisor's third-quarter results continued the trends that we've seen in previous quarters. Revenue picked up 4% to $439 million, but that was much weaker than the 7% growth that most investors had wanted to see from the online travel service. Adjusted net income was down 36% to $50 million, and although adjusted earnings of $0.36 per share topped the consensus forecast among those following the stock, they still represented a more than 30% drop from the year-ago quarter.

Terrible performance from the hotel segment was the primary detractor from TripAdvisor's performance. Hotel revenue was down 3%, making up about three-quarters of the company's overall business. However, pretax operating income from the hotel segment plunged by nearly half, just barely representing a majority of the money that TripAdvisor brought in during the quarter.

The nonhotel sector still shined for TripAdvisor, helping to cushion the blow to some extent. Revenue for the segment was up by more than 25%, and pretax operating earnings almost tripled from year-earlier levels. The company cited extremely strong growth in the attractions and restaurants areas.

From an operational standpoint, many of TripAdvisor's metrics remained favorable. Monthly unique hotel shoppers climbed 7% to 163 million, and unique visitors on the company's branded websites climbed by 17% to 455 million. TripAdvisor had collected 570 million reviews and opinions from users as of Sept. 30, covering 1.2 million hotels and other accommodations, 780,000 vacation rentals, 4.4 million restaurants, and 875,000 attractions and activities. Interestingly, the number of vacation rentals continued to fall on a sequential basis even as hotels and tourist attractions garnered more reviews. Display-based ads and subscriptions saw slight sales gains, offsetting declines in click-based and transactional revenue. The U.S. market grew faster than Europe and the rest of the world, representing a 56% share of overall sales compared to 28% and 16%, respectively, for the other two units.

What's next for TripAdvisor?

CEO Steve Kaufer tried to keep investors optimistic. "We are making progress on our 2017 initiatives," Kaufer said, noting that "in hotels, we are pursuing profitable long-term revenue growth through an improved shopper experience and a marketing shift to brand-building channels." The CEO also pointed out how attractions will play a key role in nonhotel revenue.

CFO Ernst Teunissen was actually a bit more forthcoming in his comments. "Reigniting near-term hotel growth has been more difficult than expected," Teunissen said. The CFO said that smart cost controls and good results in the nonhotel segment has helped keep the bottom line healthier than it otherwise would have been, even though TripAdvisor is spending considerable resources on television ads. In his words, "We will continue to strike and appropriate balance between near-term growth and profitability."

Still, the future is uncertain. TripAdvisor said that it expects click-based and transactional revenue growth to slow even more in the fourth quarter. The company maintained its guidance for flat to slightly down adjusted pretax operating income for the full 2017 year compared to 2016. 2018 will see many of the same trends continue, and the nonhotel segment will remain a key driver of performance while TripAdvisor keeps working to fight headwinds in building up its hotel business.

TripAdvisor shareholders didn't seem pleased with the way that the company performed, and the stock was down 8% in after-hours trading following the announcement. Until the company can demonstrate that its new business model will work to drive growth in the key hotel segment, TripAdvisor will struggle to make much headway in the increasingly competitive online travel space.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends TripAdvisor. The Motley Fool has a disclosure policy.