TripAdvisor's Turnaround Takes One Step Forward, Two Steps Back

Since reporting earnings on August 8, shares of TripAdvisor (NASDAQ: TRIP) have been all over the place -- the stock fell big after hours, surged more than 5% a few days later, then dropped again to essentially end up where it was before earnings. After a closer look at the quarter, these mixed reactions aren't all that surprising, as this was yet another "good news/bad news" quarter. While the online travel company is making progress on a couple of fronts, the lingering effects of its botched instant booking rollout continue to take a toll on TripAdvisor's core hotel business.

Hotel revenue growth took a step backward

The shift to an instant booking model -- which encouraged users to book their stays directly with TripAdvisor, even when the company didn't offer the best price -- caused hotel segment revenue growth to decline 6% last year, with the company's total top line falling 1% as well.

The company began to de-emphasize the instant booking feature earlier in 2017. Instead, TripAdvisor now highlights the lowest-priced option at the top of its search results. And at first glance, this remedy appears to have moved hotel segment results in the right direction.

However, looking specifically at the second quarter, two things stand out. First, while hotel segment revenue did show positive year-over-year growth, the rate of growth actually slowed -- from 4% in Q1 to 3% in Q2. That may not seem like much of a decline, but if TripAdvisor's top line is ever going to return to double-digit growth, the hotel segment -- which currently makes up 77% of the company's total revenue -- is going to have to lead the way. Secondly, click-based and transaction revenue growth also decelerated, from 12% in Q1 to 6% in Q2. To be fair, TripAdvisor had warned that it expected this slow down before earnings were released, but it's another sign that the business isn't recovering as quickly as it had hoped. TripAdvisor noted this deceleration was driven mostly by a greater-than-expected shift in user traffic to lower-monetizing mobile phones.

As a result, TripAdvisor was forced to lower its forward guidance in a couple of areas. Previously, the company said it expected double-digit growth in click-based and transaction revenue, as well as total revenue, for full-year 2017. The new guidance is for click-based and transaction revenue growth in the mid-single digits, and "slightly better" total revenue growth.

The company did manage to grow total revenue by 8% to $391 million, but that increase was driven more by the company's smaller, faster-growing non-hotel segment.

The non-hotel segment is looking more impressive each quarter

TripAdvisor's non-hotel segment -- which includes attractions, restaurants, and vacation rentals -- contributes just 23% of total revenue today but continues to grow like gangbusters.

Even with foreign currency effects estimated at an approximate 4% headwind, non-hotel segment revenue increased by 31% in the second quarter to $98 million. For the full year, TripAdvisor continues to expect growth of around 27% for the segment. The company also reaffirmed that it expects the non-hotel business to be profitable on an adjusted EBITDA basis for full-year 2017. The segment contributed $17 million in adjusted EBITDA for the second quarter, reflecting an adjusted EBITDA margin of 17%, both all-time highs.

The company says given the large opportunity still ahead, "we are far from being in profit-taking mode," and that it expects to keep investing heavily to build its base of bookable products.

Mobile monetization rates have a long way to go

TripAdvisor's growth issues have been compounded by an ongoing shift in its user traffic -- more than half of which now comes from mobile devices. The issue is that TripAdvisor's mobile users monetize at a far lower rate (the last reported figure was 30%) than desktop users. Put more bluntly, the more TripAdvisor's user base shifts to mobile, the less money the company takes in.

TripAdvisor launched a new, simplified hotel shopping experience during the second quarter aimed at improving monetization rates. And there are a few encouraging trends to report. Click-based and transaction revenue on mobile grew by more than 60% this quarter. And the number of mobile hotel shoppers grew 36% in Q2, representing 40% of all hotel shoppers. Best of all, even though the company didn't reveal the actual monetization rate, it did note that Q2 marked the third-straight quarter of mobile monetization improvements.

However, in its prepared remarks, TripAdvisor spelled out why the double-edged sword of mobile traffic will continue to act as a drag on its results:

A new advertising blitz may help, but it'll take time

TripAdvisor has a traffic base no other travel company can match, with 414 million average monthly unique visitors in the second quarter, up 18% year over year. Yet monetizing this asset more effectively remains the company's number one challenge. Based on the latest quarter's results, it looks like the recovery in TripAdvisor's core hotel business is going to take longer than it envisioned at the start of 2017.

The company is now in the midst of a $70-to-$80 million global advertising campaign to drive home the message that TripAdvisor is not just the best place to research trips, but the best place to book them, too. Perhaps this will be the catalyst that finally gets the company back on track. But until clearer signs emerge that TripAdvisor can return to the more robust growth rates of yesteryear, I'd expect investors to remain on the sidelines.

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Andy Gould owns shares of TripAdvisor. Andy Gould has the following options: short December 2017 $50 calls on TripAdvisor. The Motley Fool owns shares of and recommends TripAdvisor. The Motley Fool has a disclosure policy.