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TripAdvisor's 2019 Will Be a Key Test for the Business

TripAdvisor (NASDAQ: TRIP) is the world's biggest travel site, with over 450 million visitors routinely landing on its review and hotel booking pages in a given month. Yet the company hasn't yet found a way to generate sustainable sales and profit growth from that prime positioning. Revenue in its core hotel segment fell 3% last year, in fact, after having climbed just 1% in 2017.

TripAdvisor achieved a few significant operating and financial wins in 2018, though, that have management feeling more confident about their rebound plan. CEO Steve Kaufer and his team discussed those successes in a presentation to investors that was followed by a question and answer session with Wall Street analysts. Below are a few highlights from those prepared remarks.

Image source: Getty Images.

Stabilizing profits

2018 was a pivotal year for our Hotel segment.

After a few false starts, TripAdvisor's core hotel-booking business might finally be on the path to sound financial footing. The division shrank 6% in 2016 and inched higher by just 1% the following year. It returned to declines in 2018, but that 3% slump looks much better when you dig behind the headline number.

Demand trends improved in the back half of the year, for example, and TripAdvisor's click-based and transaction revenue, a key sales driver, returned to positive territory for the first time in over a year.

TripAdvisor shifted strategies to prioritize profitability over sales growth, and the results of that move have been dramatic. Executives achieved this mainly by scaling back on marketing spending that had delivered relatively weak traffic. The shift pressured revenue but led to far higher earnings. Adjusted profits jumped 24% for the full year to $356 million, equating to a 7-percentage-point increase in profit margin to 33% of sales. "[W]e delivered on our key profitability objectives," the company summarized.

Growth bright spots

Non-Hotel segment revenue accelerated to 38% growth in Q4 and 27% in full year 2018. This segment accounted for 28% of total revenue in full year 2018.

It's becoming clearer with each passing quarter that TripAdvisor's growth will increasingly come from its bookings of attractions, restaurants, tours, and vacation rentals, which management lumps together under the heading of "non-hotel" revenue. That segment has expanded by better than 20% in each of the last three years so that it now accounts for over one-quarter of the business compared to 20% in 2016.

Emboldened by those growth figures, executives plan to pour resources into the division to scale up the portfolio of bookable experiences and establish a dominant market position. The move will pressure earnings this year, executives warn, but there's a good potential for outsized returns from that spending. "We're investing deeper into [the non-hotel segment] in 2019 because we feel we have a fantastic market opportunity there ... to drive some real shareholder value by investing, rather than cranking up profitability for that business," CFO Ernst Teunissen explained.

Big questions to be answered

We are excited by what's ahead in 2019 and remain committed to operating for the long-term.

TripAdvisor forecast a further step up in profitability for the core hotel segment in 2019 while implying another year of weak sales. Its outlook for the non-hotel division was essentially the opposite: worsening short-term profitability in the context of significant revenue gains.

Compounding this mixed forecast is the fact that the company expects most of its top- and bottom-line growth to come in the latter half of the year. Thus, investors might not have a clear picture until early 2020 of just how strong the broader business can be, either with respect to sales growth or earnings power.

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Demitrios Kalogeropoulos owns shares of TripAdvisor. The Motley Fool owns shares of and recommends TripAdvisor. The Motley Fool has a disclosure policy.

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