s—“(‘(‘SCSCSCSS*S«sC SU Lo TripAdvisor (Underperform, $40 PO)
Stock view: EBITDA under pressure, brand ad spend not in Street estimates yet 2016 was a re-platforming year, and with Instant Book fully rolled out globally, the company aims to re-educate visitors on its booking offering. However, we think most TripAdvisor visitors (399mn average monthly unique visitors in 2017 and 148mn average monthly hotel shoppers) still view the site as a review/research portal, and changing customer behavior will be quite difficult, particularly as we do not think TripAdvisor has clarified its value proposition for shoppers.
While we think that TripAdvisor's elevated marketing spend in 2017 will drive a rebound in traffic, we anticipate a poor ROI. Marketing expense continues to ramp as Instant Book rolls out, though traffic growth slows, implying more costly traffic acquisition. In 40’16, Sales & Marketing as a % of sales increased to 52.8% vs. 45.6% in 4Q’15, and we think TripAdvisor essentially bought desktop Hotel Shopper traffic, though likely at poor ROI. However, higher marketing spend in 2017 does not yet include potential for a likely return to expensive brand ad campaigns. In our brand ad spend scenario analysis, we expect still more downside to estimates (see Taking a look at TripAdvisor’s potential
brand ad spend).
The company is encouraged by Revenue per Hotel Shopper growth continuing to improve from down 21% y/y in 1Q. We expect growth continues its improvement trend in 2017. However, if monetization trends decelerate, earnings downside could be significant. We think it will be difficult for TripAdvisor's Hotel revenue to return to growth next year, let alone double-digit y/y growth, given the mobile monetization headwinds. However, if the company invests heavily in traffic acquisition, particularly on higher monetizing desktop, revenue and traffic growth may reaccelerate meaningfully in 2017, though with ongoing pressure on margins.
Chart 15: Quarterly revenue and Sales & Marketing per Hotel Shopper y/y growth 40% 30% 20% 10% 0% -10% -20% -30%
© O_O ge Gh Ge gh Go ee & _& & FPP SF PPP” FM wri gh gh g
YNY Growth
—— Revenue per Hotel Shopper = =—-===S&M per Hotel Shopper
Source: BofA Merrill Lynch Global Research estimates, company report
Key theme/metric(s) for 1Q: Update on ad spend targets, 2017 guidance
TRIP’s outlook for 2017 is based on “prioritizing revenue growth as opposed to profit growth,” which implies far lower marketing return expectations. However, TRIP notes this expectation for marketing spend does not include potential for a return to brand marketing, which could be an incremental $50-70mn headwind in ’17, in our view.
Biggest 1Q issues/risks:
¢ Marketing spend: TripAdvisor has prioritized revenue growth at the expense of earnings, implying poor marketing ROI. The biggest issue facing TripAdvisor is if it decides to pursue an expensive brand/TV marketing campaign which would further drive further earnings downside.
BankofAmerica <2 ; ; Merrill Lynch Internet/e-Commerce | 06 April2017 37
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