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TripAdvisor Tells Investors That Change Is Coming

For investors keeping track, TripAdvisor (NASDAQ: TRIP) has now made three major strategic shifts since 2016. The vacation booking specialist has had to adjust to big changes in the hotel booking business as it seeks a sustainable way to monetize its huge base of engaged travelers. The moves started with a shift into instant booking in 2016, followed by a bid to shore up profitability in 2018.

The latest move came this week after TripAdvisor posted third-quarter sales trends that management described as "frustrating." Revenue worsened in the hotel segment and slowed in its new division focused on booking experiences, rentals, and restaurants.  

In a conference call with investors and a shareholder letter, CEO Steve Kaufer and his team detailed the actions they're taking today to try to stabilize the business while admitting that returns could be pressured for some time by the tough selling conditions they're seeing in the market.

Let's look at a few highlights from that presentation. 

Two travelers take a selfie.

Image source: Getty Images.

A tough quarter

Trends worsened in our hotel click-based auction, leading to a 14% decline in TripAdvisor branded hotels revenue. We believe our most significant challenge remains Google pushing its own hotel products in search results and siphoning off quality traffic that would otherwise find TripAdvisor via free links and generate high margin revenue in our hotel click-based auction. 

Results were weaker than most investors expected to see and trailed management's outlook across the platform. In the core hotel segment, sales declines worsened to 7% from 3% last year, all but ensuring that the division will not return to revenue growth this fiscal year. Executives said the main challenge was new competition from Alphabet's Google, whose search engine is highlighting its own booking products ahead of rivals'.

Sales were also underwhelming in the experiences division, which management has identified as a key growth avenue. Revenue gains slowed quicker than expected thanks to a mix of more competition and missed execution. "We are dissatisfied with our results," executives summarized, "which are particularly frustrating considering we entered 2019 with such great momentum."

The path ahead

We see growth opportunities in 2020 and beyond, and we are addressing them with urgency. 

TripAdvisor doesn't see the competitive landscape on Google improving any time soon, so the company is shifting its focus to try to maximize growth in other areas like advertising and restaurant bookings. The rebound strategy also involves working to bring the experiences segment up to par through marketing and app development. Success here should show up in higher conversion and repeat bookings rates, and in sales growth that more closely tracks the over 100% increase in available inventory TripAdvisor is achieving right now.

New financial realities

Loss of revenue in our [search engine optimization] channel in hotel has been negatively affecting our bottom line, and we will prudently reduce and reallocate expenses in certain parts of our business to preserve strong profitability while investing in strategic growth areas. 

Another clue that TripAdvisor isn't expecting a quick return to normal is the fact that management announced another cost-cutting plan aimed at better aligning the hotel segment with the lower growth and earnings outlook. The good news is that these moves will protect margins and generate cash that can be redirected toward more promising initiatives. The savings will also result in higher returns to investors, as demonstrated by TripAdvisor's announcement of a special dividend of $3.50 per share.

On the other hand, investors seem destined to endure another year of weakening operating trends in 2019 and into 2020, which leaves unanswered the question about whether the consumer discretionary stock can build a sustainable business around its industry-leading travel site network.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Demitrios Kalogeropoulos owns shares of TripAdvisor. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and TripAdvisor. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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