UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-35362
TRIPADVISOR, INC.
(Exact name of registrant as specified in its charter)
Delaware | 80-0743202 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
141 Needham Street
Newton, MA 02464
(Address of principal executive office) (Zip Code)
Registrants telephone number, including area code:
(617) 670-6300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: |
Name of each exchange on which registered: | |
Common Stock, $0.001 par value | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant as of the last business day of the registrants most recently completed second fiscal quarter was $6,817,578,784 based on the closing price on NASDAQ on such date. For the purpose of the foregoing calculation only, all directors and executive officers of the registrant are assumed to be affiliates of the registrant.
Class |
Outstanding Shares at February 6, 2014 | |
Common Stock, $0.001 par value per share |
129,432,796 shares | |
Class B Common Stock, $0.001 par value per share |
12,799,999 shares |
Documents Incorporated by Reference
The registrant intends to file a proxy statement pursuant to Regulation 14A not later than 120 days after the close of the fiscal year ended December 31, 2013. Portions of such proxy statement are incorporated by reference into Part III of this Annual Report on Form 10-K.
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Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, principally, but not only, in the sections entitled Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations. We caution investors that any forward-looking statements in this report, or which management may make orally or in writing from time to time, are based on managements beliefs and on assumptions made by, and information currently available to, management. When used, the words anticipate, believe, could, estimate, expect, intend, may, might, plan, project, result should, will, and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those anticipated, estimated or projected by the forward-looking statements. We caution you that, while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:
| If we are unable to continue to increase visitors to our websites and to cost-effectively convert these visitors into repeat users or contributors, our advertising revenue could decline. |
| Declines or disruptions in the travel industry, as a result of global economic conditions or otherwise, could adversely affect our businesses and financial performance. |
| As we derive substantially all of our revenue from advertising, any significant reduction in spending by advertisers could harm our business. |
| As we rely on a relatively small number of significant advertisers, including Expedia and Priceline (and their subsidiaries), any reduction in spending by or loss of those advertisers could seriously harm our business. |
| Growth in the use of TripAdvisor through smartphones as a substitute for use on personal computers and tablets may negatively affect our revenue and financial results. |
| We rely on the value of our brand and consumer trust in our brand, and the costs of maintaining and enhancing brand awareness, including through social and traditional media, are increasing. |
| We face competition from companies and websites that collect travel-related content, which could divert traffic from our websites causing financial harm to us. |
| Some of our customers, including some of our click-based advertising partners, are also our competitors, and the consolidation of our competitors and our partners may affect our competitiveness and partner relationships. |
| We are dependent upon the quality of traffic in our network to provide value to advertisers, and any failure in quality control could have a material adverse effect on the value of our websites to our advertisers and adversely affect our revenue. |
The risks set forth above are not exhaustive. Please refer to the section entitled Part I, Item 1A. Risk Factors. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can we assess
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the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to our quarterly reports on Form 10-Q for future periods and current reports on Form 8-K as we file them with the Securities and Exchange Commission, or the SEC, and to other materials we may furnish to the public from time to time through Form 8-Ks or otherwise, for a discussion of risks and uncertainties that may cause actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements. We expressly disclaim any responsibility to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events, or otherwise, and you should not rely upon these forward-looking statements after the date of this report.
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Item 1. | Business |
Overview
TripAdvisor is the worlds largest online travel company. Our mission is to help people around the world plan and have the perfect trip by giving them access to the reviews and opinions of the millions of travelers who make up our global online community. TripAdvisor aggregates reviews and opinions about destinations, accommodations (including hotels, B&Bs, specialty lodging and vacation rentals), restaurants and activities throughout the world. Our platform also enables consumers to book hotels, vacation rentals, airline tickets, vacation packages, destination services and even cruises.
TripAdvisor was co-founded in February 2000 by Stephen Kaufer, our current President and Chief Executive Officer. TripAdvisor was acquired by IAC/InterActiveCorp, or IAC, in April 2004. In August 2005, IAC spun-off its portfolio of travel brands, including TripAdvisor, into a separate newly-formed Delaware corporation, called Expedia, Inc., or Expedia. On December 20, 2011, Expedia completed the spin-off of TripAdvisor into a separate publicly traded Delaware corporation.
2013 Highlights
Following are some business highlights for fiscal 2013:
| We introduced hotel metasearch functionality on our TripAdvisor-branded websites to provide consumers with real-time online hotel availability and pricing information from multiple sources without requiring the user to visit another website. |
| We launched points of sale in Venezuela, Peru, Chile, and Columbia, bringing our total TripAdvisor-branded websites to 34, which includes tripadvisor.com in the United States and daodao.com in China. |
| We completed six acquisitions during 2013: TinyPost, the developer of a product that enables users to embed text over photos and turn them into stories; Jetsetter, a members-only private sale site for hotel bookings; CruiseWise, a cruise research and planning site; Niumba, a Spain-based vacation rental site; GateGuru, a mobile app with flight and airport information around the world; and Oyster, a hotel review website featuring expert reviews and photos covering approximately 150 cities. |
| We now manage and operate 20 travel media brands in addition to our flagship TripAdvisor brand, all of which are connected by the common goal of providing comprehensive travel planning resources across the travel sector. |
| Our websites globally reached more than 260 million monthly unique visitors during the year ended December 31, 2013, according to Google Analytics. At approximately 11% of the worlds monthly unique visitors in online travel, TripAdvisor remains the largest travel website in the world at December 31, 2013 according to comScore Media Metrix. |
| Cumulative downloads of TripAdvisors appsincluding TripAdvisor, City Guides, SeatGuru, Jetsetter and GateGurureached 82 million and average monthly unique visitors via smartphone and tablet devices grew over 170% year-over-year to approximately 87 million for the year ended December 31, 2013, according to company logs. |
| We feature over 125 million reviews and opinions on more than 775,000 hotels and accommodations and approximately 550,000 vacation rentalsas well as more than 2 million restaurants and 400,000 attractions in 139,000 destinations throughout the world. |
| We entered into an agreement with Samsung to pre-install TripAdvisors market-leading mobile application onto the new Samsung GALAXY S4. In addition to pre-installing TripAdvisors industry-leading app, Samsung is using TripAdvisors user content to power its Travel Widget, Lock Screen Slideshow and City Information in Samsung Story Album. |
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| We launched our first-ever major onsite affinity partnership with American Express in multiple key markets as well as an innovative digital travel magazine created in partnership with Axel Springer, a leading integrated multimedia company in Europe. |
| We released new technology and product initiatives such as native apps on iOS and Android; TripConnect, a platform that enables independent hoteliers to purchase leads from TripAdvisor and Delayed Ad Call functionality for our Display-based advertising product, a first for the travel advertising industry, which charges customers only when the ad unit is in a users view. |
Our Flagship TripAdvisor-Branded Websites
Since the initial launch of the U.S.-based tripadvisor.com website in November 2000, TripAdvisor-branded websites have been added in the following locations in the languages described below:
Website |
Target Location |
Language |
Launch Date | |||
tripadvisor.com.ve | Venezuela | Spanish | September 2013 | |||
tripadvisor.com.pe | Peru | Spanish | September 2013 | |||
tripadvisor.cl | Chile | Spanish | September 2013 | |||
tripadvisor.co | Columbia | Spanish | September 2013 | |||
tripadvisor.com.eg | Egypt | Arabic | June 2011 | |||
tripadvisor.com.my | Malaysia | English | March 2011 | |||
tripadvisor.tw | Taiwan | Chinese (Traditional) | February 2011 | |||
tripadvisor.com.ar | Argentina | Spanish | December 2010 | |||
tripadvisor.co.id | Indonesia | Bahasa | November 2010 | |||
tripadvisor.gr | Greece | Greek | October 2010 | |||
tripadvisor.ru | Russia | Russian | October 2010 | |||
th.tripadvisor.com | Thailand | Thai | August 2010 | |||
tripadvisor.co.kr | South Korea | Korean | August 2010 | |||
tripadvisor.com.sg | Singapore | English | August 2010 | |||
pl.tripadvisor.com | Poland | Polish | March 2010 | |||
no.tripadvisor.com | Norway | Norwegian | March 2010 | |||
tripadvisor.com.au | Australia | English | March 2010 | |||
tripadvisor.com.tr | Turkey | Turkish | December 2009 | |||
tripadvisor.com.mx | Mexico | Spanish | December 2009 | |||
tripadvisor.dk | Denmark | Danish | December 2009 | |||
tripadvisor.ca | Canada | English | August 2009 | |||
tripadvisor.se | Sweden | Swedish | April 2009 | |||
tripadvisor.nl | Netherlands | Dutch | April 2009 | |||
daodao.com | China | Chinese (Simplified) | April 2009 | |||
tripadvisor.com.br | Brazil | Portuguese | April 2009 | |||
tripadvisor.jp | Japan | Japanese | October 2008 | |||
tripadvisor.in | India | English | August 2008 | |||
tripadvisor.es | Spain | Spanish | January 2006 | |||
tripadvisor.it | Italy | Italian | January 2006 | |||
tripadvisor.de | Germany | German | January 2006 | |||
tripadvisor.fr | France | French | January 2006 | |||
tripadvisor.co.uk | United Kingdom | English | November 2005 | |||
tripadvisor.ie | Ireland | English | November 2005 |
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Other Travel Brands and Websites
In addition to the flagship TripAdvisor-branded websites, we have also acquired and launched numerous other travel brands, all of which are connected by the common goal of providing travelers with valuable resources across the travel sector, including resources for planning your trip as well as making the appropriate booking arrangements. These brands have expanded our reach, product breadth and appeal to domestic and international advertisers.
Brands acquired include:
Website |
Date Acquired |
Key Focus | ||
oyster.com |
October 2013 | Hotel review website featuring expert reviews and photos covering about 150 cities. | ||
gateguru.com |
June 2013 | Mobile resource for up-to-date flight and airport information around the world. | ||
niumba.com |
May 2013 | A Spanish-based vacation rental site, featuring properties listed globally and the worlds largest collection of Spanish vacation rentals. | ||
jetsetter.com |
April 2013 | Members-only private sale site providing insider access, expert knowledge and exclusive deals for vacations around the world. | ||
everytrail.com |
February 2011 | Mobile application and website for collecting and sharing geo-tagged user-generated travel content, such as walking tours, road trips, sight-seeing tours and sailing trips. | ||
holidaylettings.co.uk |
June 2010 | A leading U.K.-based vacation rental site, featuring residential properties globally listed for rental, enabling users to live like a local while on holiday. | ||
kuxun.cn |
October 2009 | Travel metasearch engine, much like TripAdvisor, operating in China. | ||
flipkey.com |
August 2008 | A vacation rental website featuring a large collection of vacation rental guest reviews on residential properties listed for vacation rental around the world. | ||
onetime.com |
June 2008 | Comparison shopping travel website that allows travel shoppers to conduct itinerary-based, multi-site searches for flights, hotels, cruises, vacations, and car rentals. | ||
virtualtourist.com |
June 2008 | Travel-oriented community website featuring user-contributed travel guides for locations worldwide. | ||
airfarewatchdog.com |
March 2008 | Provides up-to-date airline deals that have been researched and verified by a team of dedicated airfare experts. | ||
holidaywatchdog.com |
January 2008 | U.K.-based website for traveler reviews on hotels and destinations focusing on the Mediterranean. | ||
cruisecritic.com |
May 2007 | A community of avid and first-time cruisers who enjoy the fun of planning, researching and sharing their passion for cruising. Cruise Critic offers objective cruise reviews written by expert travel writers and members. | ||
independenttraveler.com |
May 2007 | A travelers exchange that features practical travel resources for a community of international travelers who enjoy the adventure of independent travel. | ||
seatguru.com |
March 2007 | Features aircraft seat maps, seat reviews, and a color-coded system to identify superior and substandard airline seats. | ||
bookingbuddy.com |
February 2007 | Travel shopping website that gives travelers easy access to airfare, hotel, car rental, cruise, vacation rental, and vacation deals, plus prices from selected travel sites. |
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Website |
Date Acquired |
Key Focus | ||
smartertravel.com |
February 2007 | One of the largest online travel resources for independent expert advice for the budget-conscious traveler. The SmarterTravel editorial staff provides advice and analysis to help travelers find the best deals and get the most value from their trips. | ||
travelpod.com |
December 2006 | Pioneering travel blog website. |
Brands developed internally and launched include:
Website |
Date Launched |
Key Focus | ||
tingo.com | March 2012 | The first hotel booking site that automatically rebooks hotel rooms at a lower price if the rate drops and automatically refunds the difference to the travelers credit cards. | ||
familyvacationcritic.com | June 2009 | Reviews of family-friendly hotels, resorts, destinations and attractions, written by experienced family travel experts. |
Additional brands which are no longer being developed are as follows:
Website |
Date Acquired/ |
Key Focus | ||
cruisewise.com | May 2013 | A cruise research and planning site. This business was successfully integrated into our Cruise Critic travel brand during 2013. | ||
tinypost.co | March 2013 | The developer of a product that enabled users to write over photos and turn them into stories. | ||
whereivebeen.com | July 2011 | Website and social platform with a detailed interactive world map that let users share where they have been, lived, and want to go. This website is no longer operating. | ||
sniqueaway.com | September 2010 | U.S.-based members-only flash sale website, developed internally, which provided exclusive limited time access to deals on top hotels at deep discounts. The functionality of this site was successfully integrated into our Jetsetter travel brand during 2013. | ||
travel-library.com | September 2006 | Travel website with user-generated reviews. |
Our Industry
We operate in the online advertising sector of the global travel industry. As a result, we are impacted by trends in the global travel industry, the online travel market and online advertising.
Global Travel Industry
According to the PhoCusWright, gross bookings in the global travel industry are expected to be greater than $1.3 trillion in 2014. Recent historical trends show that, each year, an increasing percentage of global travel spending has been conducted online through supplier websites and online travel agencies. We believe that this trend will continue as online penetration continues to grow, as more consumers gain broadband access to the Internet, as smartphone, tablets and other mobile computing devices continue to proliferate, and as travel activity increases along with an expanding middle class in certain developing countries like China and India.
Online Travel Market
According to the International Data Corporation, or IDC, New Media Market Model, only 26% of the approximately $51 billion that is expected to be spent on travel advertising will be spent online in 2016. We believe that the Internet will continue to become even more integral to the travel-planning process due to
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increasing worldwide online penetration, particularly given the capabilities that the Internet provides travelers, including the ability to refine searches, compare destinations and view real-time pricing.
Online Advertising
According to the IDC New Media Market Model, the global online advertising market is growing and is projected to exceed $165 billion by 2016, as more and more advertisers continue to shift their spending from offline to online channels, mirroring the trend in consumer media consumption generally. Given the size of the online advertising market, we believe that travel providers and travel related advertisers are, and will continue to be, motivated to devote significant resources to advertise their travel products and services. In addition, as more and more travel transactions are conducted online generally, we believe that an increasing amount of travel advertising spending will migrate from traditional offline advertising channels to online advertising opportunities.
Our Key Strengths
Prior to 2000, travel research and planning was largely conducted with the assistance and guidance of a personal travel agent or advice from friends and family. Consumers had no single resource to access recent and comprehensive destination, lodging, restaurant and attraction feedback and information. We were founded with the goal of providing an online resource based on user-generated content to prospective travelers. We have democratized the travel research and planning process by using the power of the Internet to create transparency in the travel planning process with a comprehensive online resource for travel information. We provide the ability and information to plan and have the perfect trip for any customer with access to the Internet, whether through their desktop, smartphone or tablet devices.
In order to achieve our goals, we leverage our key assetsa robust travel community, rich user-generated content, continuous technological innovation and global reachas follows:
| Robust Travel Community. We believe that we have the largest breadth of content in our markets, and that, because of this breadth, travelers gravitate to TripAdvisor-branded websites to research their travel plans. By providing an interactive forum to share travel experiences, we allow the voice of our large and highly engaged community of travelers to influence decision-making during the travel planning phase. To facilitate planning, we enable consumers to research pricing and availability from third-party travel booking sites. To encourage better travel experiences for consumers and to create a feedback loop between the hospitality industry and individual travelers, we allow hospitality management representatives to respond to reviews of their properties on our website. After completing their trip, consumers can return to our websites to write reviews to give back to the community that helped them plan their trip. Through this cycle, more content is generated, which drives community, traffic, loyalty and higher search engine rankings, all of which lead to further content creation. We believe that the volume of reviews generated on TripAdvisor-branded websites and the robust feedback loop created on TripAdvisor-branded websites provides us with a significant advantage over our competitors. |
| Rich User-Generated Content. We believe that the best travel content comes from the wisdom and insight of a robust community of travelers. We leverage user-generated content to power travel planning by allowing members to create reviews and share opinions on hundreds of thousands of accommodations, destinations, attractions and restaurants. As evidenced by the growth of our business, this type of travel planning has been embraced by travelers. To promote an enthusiastic reviewer community and brand affiliation, we have launched several programs to recognize reviewer contributions, including site badges, helpful vote recognition, and other community-focused features, all of which highlight the current and helpful reviews and opinions available throughout the TripAdvisor community and promote brand affiliation. |
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| Technology and Innovation. We focus heavily on speed-to-market and product innovation in order to create a richer experience for travelers, and our team deploys weekly engineering releases with new products and features. Some recent examples of this product innovation include: our development and launch of hotel metasearch functionality, which makes it even easier for users to research and plan their perfect trip on TripAdvisor; TripConnect, a platform that enables independent hoteliers to purchase leads from TripAdvisor; the release of new native mobile apps on iOS and Android; and a roll out of a major iPad app refresh. We are also continuing to invest heavily in the rapidly growing mobile channel by providing 80 mobile city guides of the most popular cities globally, adding menus to restaurant pages, displaying bookable tickets to attractions pages, releasing hotel pricing and availability improvements, and integrating Facebook login into our industry-leading mobile websites as well as tablet and smartphone applications that are currently available in 21 languages. Our ongoing commitment to innovation also extends to content syndication and review collection partnerships, as we leverage our technology and content for the benefit of other websites. In addition, we expend significant effort with respect to manual and electronic fraud detection in order to maintain the quality and authenticity of user reviews, and have clear posting guidelines for user content submission. |
| Global Reach. We are a global company, both through the reach of our portfolio of branded websites and through our in-market staffing in fifteen countries. As of December 31, 2013, we had TripAdvisor branded websites in 34 countries and 21 languages, including a local language website in China under the brand daodao.com. We have over 300 million review translations, and are committed to continuing to improve the in-country user experience and the local content coverage for all of our points-of-sale. As of December 31, 2013, we had approximately 871 employees based outside of the United States. We believe that the universally-relevant content and community of our core TripAdvisor platform and other brands uniquely position us to appeal to travelers throughout the world. |
Our Strategy
To expand our global reach, we leverage significant investments in technology, operations, brand-building, and relationships with advertisers and other partners. These investments have enabled us to, among other things, aggregate a large base of consumer reviews, in a variety of languages, across our global platform of TripAdvisor-branded websites. We plan to continue leveraging these investments through the following:
| Investing in Technology. We believe that our ability to continue to innovate by providing additional functionality to our main Internet sites, while at the same time continuing to extend that functionality to additional platforms such as smartphones and tablets, will enable us to continue providing an industry-leading user experience. We have a strong culture of speed-to-market with our innovations. By innovating and releasing updates quickly, we believe that we can continue to grow our site visitors, reviews and opinions, increase revenue and effectively compete with our competitors. |
| Expanding Our Social and Personalization Platform. In addition to member acquisition efforts on social media channels, including Facebook, Twitter and other social sharing platforms, we intend to continue to expand our social integration and personalization efforts. We believe these initiatives will enable us to continue to grow and maintain engagement with our user base and increase our content. To date, we have leveraged Facebook Connect to allow users to share their reviews and ratings with their friends and publish their travel activity to their timelines on Facebook. We are increasingly able to offer personalized recommendations to users based on friends reviews and ratings as well as information collected about a users preferences in selecting hotels. |
| Improving the Hotel Shopper Experience. We continue to invest in user experience enhancements that improve the hotel shopping experience. We have offered a flight metasearch product that displays availability and pricing information from multiple sources since 2009, expanding internationally to 19 points of sale in 2012 and increasing to 29 points of sale as of December 31, 2013. In 2012, we introduced hotel metasearch to our global smartphone traffic and in June 2013, we completed the process of fully implementing hotel metasearch functionality onto our desktop and tablet platforms. In addition to |
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metasearch, we continue to offer and improve features such as user reviews, photos, mapping, and filtering to assist users in finding the right hotel for their trip. |
| Investing in Traffic Growth. Attracting more visitors to our sites is at the core of our strategic plan and we dedicate significant time and financial resources towards amplifying our global brand. We do this through online and offline marketing channels to maximize the number of users who navigate to our site either directly, also known as domain direct traffic, or from the marketing channel directly. Offline advertising channels we have used in the past to amplify our brands include: permanent branding campaigns such as TripAdvisor-branded travel awards, certificates, stickers and badges and television advertising. Online advertising channels we have used in the past to amplify our brand include, but are not limited to: customer relationship management email campaigns, or CRM; social networks; organic search through search engine optimization, or SEO; paid search through search engine marketing, or SEM; and referrals from partners whose sites contain links to TripAdvisor content, badges or widgets. At approximately 11% of global online travel uniques, according to comScore Media Metrix, we believe that we have a large opportunity to continue growing visitors. In order to achieve this objective, we intend to invest in the aforementioned channels, as well as any new channels that we may identify in the future. |
| Enhancing International Offerings. We are focused on strengthening our broad global footprint as we believe that international markets represent a long-term strategic opportunity for us. We are continuing to improve localization and grow our user base in Europe, Asia and South America, especially in emerging markets, such as Brazil, Russia and China. In addition, we currently have two lead product offerings in the Chinese marketDaoDao and Kuxunboth headquartered in Beijing. We continue to invest heavily and operate at a loss in the Chinese market and will continue to enhance our international offerings. |
| Growth through Strategic Acquisitions. We have a history of successfully acquiring and integrating companies that expand our footprint either geographically or in market sectors that are complementary to our flagship properties. We intend to continue to grow our business and expand our product and service offerings through acquisitions that either complement our existing businesses or provide additional resources, products and/or services that will improve the user experience. |
Our Business Model
Our platforms connect users wishing to plan and have the best travel experiences with providers of travel accommodations and travel services around the world. We derive substantially all of our revenue from the sale of advertising, primarily through click-based advertising and, to a lesser extent, display-based advertising. The remainder of our revenue is generated through a combination of subscription-based offerings, allowing users to book room nights on our transactional sites, and other revenue including content licensing.
| Click-Based Advertising Revenue. Our largest source of revenue is click-based advertising, which includes links to our partners booking sites and contextually-relevant branded and unbranded text links. Our click-based advertising partners are predominantly online travel agencies and direct suppliers in the hotel, airline and cruise product categories. Click-based advertising is generally priced on a cost-per-click, or CPC, basis, with payments from advertisers based on the number of users who click on each type of link. Most of our click-based advertising contracts can be terminated by the advertisers at will or on short notice. For the years ended December 31, 2013, 2012 and 2011, we earned $696 million, $588 million and $500 million, respectively, of revenue from click-based advertising. |
| Display-Based Advertising Revenue. We earn revenue from a variety of display-based advertising placements on our websites through which our advertising partners can promote their brands in a contextually-relevant manner. While our display-based advertising clients are predominately direct suppliers in the hotel, airline and cruise categories and online travel agencies, we also accept display advertising from destination marketing organizations, casinos, resorts and attractions, as well as advertisers from non-travel categories. We generally sell our display-based advertising on a cost per |
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thousand impressions, or CPM, basis. Our display-based advertising products also include a number of custom-built products including the sponsorship of certain site features and functionality, for example, Delayed Ad Call, which charges customers only when the ad unit is in a users view, as well as certain customized co-branded features. For the years ended December 31, 2013, 2012 and 2011, we earned $119 million, $94 million and $86 million, respectively, in revenue from display-based advertising. |
| Subscription-Based, Transaction and Other Revenue. Business Listings, is a subscription-based advertising product offered to hotels, B&Bs and other specialty lodging properties. Managed by our TripAdvisor for Business team, this advertising product is sold for a flat fee per time period and allows subscribers to list a website URL, email address and phone number on TripAdvisor-branded websites as well as to post special offers for travelers. Our Vacation Rentals business consists of our U.S.-based TripAdvisor Vacation Rentals and FlipKey brands as well as our Europe-based Holiday Lettings, and Niumba brands. This product is sold to individual vacation property owners and property managers, either as a flat subscription fee per time period or as a free-to-list commission-based model, to list properties on our websites. Other revenue consists of making hotel room nights available for booking on our transactional sites, including our Jetsetter and Tingo brands, as well as content licensing arrangements with third-party sites. For the years ended December 31, 2013, 2012 and 2011 we earned $130 million, $81 million and $51 million, respectively, in revenue from subscription-based, transaction and other revenue. |
Strategic Relationships
Click-Based Advertisers
We have click-based advertising relationships with the vast majority of the leading online travel agencies as well as a variety of other travel suppliers pursuant to which these companies purchase traveler leads from us, generally on a CPC basis. For the year ended December 31, 2013, our two most significant advertising customers, Expedia and Priceline (and their subsidiaries), each accounted for more than 10% of our total revenue and combined accounted for 47% of total revenue. These and our other click-based advertising relationships are strategically important to us and most can be terminated by the advertiser at will or on short notice.
Content-Related Partnerships
We have a content licensing program utilized by over 850 partners across the world, including hotel chains, online travel agents, tourist boards, airlines and media sites. TripAdvisor also distributes its content through self-service HTML widgets, which are used on the websites of hotels, restaurants, attractions and destination marketing organizations. These products, which are available at no cost in the TripAdvisor Management Center, allow businesses and destinations to promote themselves by displaying their TripAdvisor ratings, reviews and awards. TripAdvisor widgets are presently found on more than 100,000 unique domains around the globe, reaching over 500 million people per month. Partners benefit from our user-generated content, such as reviews, ratings, photos and traveler forums. In addition, we power review collection for a growing number of partners, such as Accor Hotels, Wyndham Hotel Group, Best Western and Easytobook.com, enabling them to proactively collect reviews from their own customers post-stay in their own branded environment. We have also developed partnerships with mobile carriers and device manufacturers.
Syndication Partners
We also syndicate our click-based advertising to third-party websites. The largest such syndication relationship is with Yahoo! Travel Guides, pursuant to which we provide show prices advertising on the Yahoo! Travel Guides hotel pages. Other syndication partners include Bing and Axel Springer.
Marketing and Promotions
We have established widely used and recognized brands through marketing and promotion campaigns. We continue to aggressively promote our brands, particularly our flagship brand TripAdvisor. Our marketing
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programs are intended to build and maintain the value of our brands, promote consumer engagement and contributions, drive qualified clicks to our partners and strategically position our brands in the market. Our long-term success depends on our continued ability to maintain and increase the overall number of consumers flowing through our brand in a cost-effective manner, as well as our ability to attract consumers who will share their own content from their trips. Our marketing channels include SEM and SEO. We also reach consumers across the web through our online marketing program, and offline through our more recent offline brand campaigns. We also utilize CRM in which we send relevant and engaging traveler communications to our members via email. We have a robust global public relations program that yields placements on a constant basis in major print and online publications. We continue to look for new ways to build brand awareness and expand new channels, which may include traditional media and social media channels including Facebook and Twitter to deepen customer engagement. We syndicate our content so that other sites can feature TripAdvisor branding and content. Lastly, marketing and product development initiatives are closely tied. We are constantly creating helpful features and functionality so that our consumers can discover more relevant travel and review content that they want to talk about and share with their friends.
Operations and Technology
We have assembled a team of highly skilled software engineers, computer scientists, data scientists, network engineers, and systems engineers whose expertise spans a broad range of technical areas, including a wide variety of open source operating systems, databases, languages, analytics, networking, scalable web architecture, operations, and warehousing technologies. We make significant investments in product and feature development, data management, personalization technologies, scalable infrastructures, networking, data warehousing, and search engine technologies. The TripAdvisor-branded websites are powered primarily using Java programming language.
Our systems infrastructure, web and database servers for TripAdvisor-branded websites are housed at two geographically separate facilities and have multiple communication links as well as continuous monitoring and engineering support. Each facility is fully self-sufficient and operational with its own hardware, networking, software, and content, and is structured in an active/passive, fully redundant configuration. Substantially all of our software components, data, and content are replicated in multiple datacenters and development centers, as well as being backed up at offsite locations. Our systems are monitored and protected though multiple layers of security. Several of our individual subsidiaries and businesses, including our subsidiaries in China, have their own data infrastructure and technology teams.
Widespread adoption of mobile devices such as iPhone, Android-enabled smart phones and tablets such as the iPad, coupled with the improved web browsing functionality and development of thousands of useful apps available on these devices, is driving substantial traffic and commerce activity to mobile platforms. We have seen tremendous growth in the adoption of mobile platforms, as have our advertising partners. Advertising opportunities may be more limited on mobile devices given their small screen sizes. Further, given the size and technical limitations of tablets and smartphones, mobile consumers may not be willing to download multiple apps from multiple travel service providers and instead prefer to use one or a limited number of apps for their mobile travel activity. As a result, the consumer experience with mobile apps (as well as brand recognition and loyalty) is becoming increasingly important and we make significant investments in this area.
We believe that mobile bookings present an opportunity for growth and are necessary to maintain and grow our business as consumers increasingly turn to mobile devices and mobile applications. If we are unable to continue to rapidly innovate and create new, user-friendly and differentiated mobile offerings and efficiently and effectively advertise and distribute on these platforms, or if our mobile apps are not downloaded and used by travel consumers, we could lose market share to existing or new entrants and our future growth and results of operations could be adversely effected. As a result, we have made significant progress creating mobile offerings which have received strong reviews, solid download trends and are driving a material and increasing share of our business. Our smartphone monetization strategies are still developing, as smartphone monetization was less than
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20% of desktop monetization of hotel shoppers during the year ended December 31, 2013, while tablets monetize more closely to desktops.
Competition
We face competition for users, advertisers and travel reviews. Our primary competitors include large online portals, social networking sites and search engines, such as Google, Microsofts Bing (including Bing Travel), Yahoo! (including Yahoo! Travel) and Baidu. We face competition from online travel agencies (such as Expedia and Priceline and their respective subsidiaries), as well as wholesalers, tour operators and traditional offline travel agencies. We also compete with a wide range of other companies, including Airbnb, Inc., Ctrip.com International, Ltd., HolidayCheck AG, HomeAway, Inc., and Yelp, Inc.
Competition for Content and Travel Reviews
We are the worlds largest global platform for travel-related reviews and opinions and we face competition in the travel review space from online travel agencies, such as Expedia and Priceline and their respective subsidiaries, which solicit reviews from travelers who book travel on their websites. Moreover, networks with significant installed user bases such as Google (for example, via Google + Local and Google Hotel Finder) have begun to compete more directly with us by attracting and accumulating user-generated travel reviews and opinions or may pursue the acquisition of travel-related content directly from consumers, and other networks and channels, like Facebook, could choose to do the same.
Competition for Users
In the competition to attract users, we rely on our ability to acquire traffic through offline brand recognition and brand-direct efforts such as television, email and online search, whether unpaid or paid. Unpaid search is sometimes referred to as search engine optimization, or SEO, which is the practice of developing websites with relevant and current content that rank well in organic, or unpaid, search engine results. SEO can be affected by a number of factors including competitive site content, changes to our website architecture and page designs, changes to search engine ranking algorithms, or changes to display ordering in search engine results such as preferred placement for internal products offered by search engines. SEM is a form of Internet marketing that involves the promotion of websites by increasing their visibility in search engine results pages through the use of paid placement, contextual advertising, and paid inclusion. SEM is a competitive marketplace with competitors continually updating their traffic acquisition strategies and economic models across a large number of keywords and markets.
Competition for Advertisers
We compete for travel-related advertising budgets with large, established search engines with significantly greater resources than we have, such as Google, Bing, and Yahoo!, as well as online media companies and ad networks, offline advertising sources, such as television and print media. These competitors have large client bases and significantly greater resources than we have and expertise in developing online commerce and facilitating internet traffic are creating inroads into online travel. Competition from these parties could cause us to lose advertising customers or shares of advertising expenditures. For example, Google has launched Hotel Finder, a search tool that enables users to search and compare hotel accommodations based on parameters set by users and has, at times, placed the Google supplier websites or its own search engine at or near the top of hotel-related search results. In addition, Microsoft has launched Bing Travel, which searches for hotel reservations and air fares online and predicts the best time to purchase them. If Google, Bing or any other leading search engines refer significant traffic to these or other travel services that they develop in the future, or otherwise favor supplier websites or other travel service websites over other online travel sites, including us, it would likely become more difficult and expensive for us to generate traffic to our websites and therefore maintain or grow our market share.
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Certain of the companies we do business with are also our competitors. The consolidation of our competitors and partners, including Expedia (through its investment in Trivago) and Priceline (through its acquisition of Kayak), may affect our competitiveness and partner relationships. As the market evolves for online travel content and the technology supporting it, including new platforms such as smartphone and tablet computing devices, we anticipate that the existing competitive landscape will change and new competitors may emerge.
Intellectual Property
Our intellectual property, including patents, trademarks, copyrights, domain names, trade dress, proprietary technology and trade secrets, is an important component of our business. We rely on our intellectual property rights in our content, proprietary technology, software code, ratings indexes, databases of reviews and forum content, images, videos, graphics and brands. We have acquired some of our intellectual property rights through licenses and content agreements with third parties. These licenses and agreements may place restrictions on our use of the intellectual property.
We protect our intellectual property by relying on our terms of use, confidentiality procedures and contractual provisions, as well as on international, national, state and common law rights. In addition, we enter into confidentiality and invention assignment agreements with employees and contractors, and confidentiality agreements with other third parties. We protect our brands by pursuing the trademark registration of our core brands, such as TripAdvisor and the Owl Logo, maintaining our trademark portfolio, securing contractual trademark rights protection when appropriate, and relying on common law trademark rights when appropriate. We also register copyrights and domain names as deemed appropriate. Additionally, we protect our trademarks, domain names and copyrights with an enforcement program and the use of intellectual property licenses.
We have considered, and will continue to consider, the appropriateness of filing for patents to protect future inventions, as circumstances may warrant. However, many patents protect only specific inventions and there can be no assurance that others may not create new products or methods that achieve similar results without infringing upon patents owned by us.
Government Regulation
We are subject to a number of United States federal and state and foreign laws and regulations that affect companies conducting business on the Internet, many of which are still evolving and being tested in courts, and could be interpreted in ways that could harm our business. These may involve user privacy, libel, rights of publicity, data protection, content, intellectual property, distribution, electronic contracts and other communications, competition, protection of minors, consumer protection, taxation and online payment services. In particular, we are subject to United States federal and state and foreign laws regarding privacy and protection of user data. Foreign data protection, privacy, and other laws and regulations are often more restrictive than those in the United States. United States federal and state and foreign laws and regulations are constantly evolving and can be subject to significant change. In addition, the application and interpretation of these laws and regulations is often uncertain, particularly in the new and rapidly-evolving industry in which we operate. There are also a number of legislative proposals pending before the United States Congress, various state legislative bodies, and foreign governments concerning data protection which could affect us.
In addition, we provide advertising data and information and conduct marketing activities that are subject to United States federal and state consumer protection laws that regulate unfair and deceptive practices, domestically and internationally. The United States and European Union have begun to adopt legislation that regulates certain aspects of the Internet, including online editorial and user-generated content, user privacy, behavioral targeting and online advertising, taxation, and liability for third-party activities.
United States federal, state and foreign governments are also considering alternative legislative and regulatory proposals that would increase regulation on Internet advertising. It is impossible to predict whether
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new taxes or regulations will be imposed on our services, and whether or how we might be affected. Increased regulation of the Internet could increase the cost of doing business or otherwise materially adversely affect our business, financial condition or operational results.
Segment and Geographic Areas
We have one operating and reportable segment. The segment is determined based on how our chief operating decision maker manages our business, makes operating decisions, evaluates operating performance and allocates resources. The chief operating decision maker for the Company is our Chief Executive Officer.
The following table presents revenue by geographic area, the United States, the United Kingdom and all other countries, based on the geographic location of our websites for the periods presented:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in thousands) | ||||||||||||
Revenue |
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United States |
$ | 462,920 | $ | 386,211 | $ | 348,066 | ||||||
United Kingdom |
119,041 | 110,213 | 99,646 | |||||||||
All other countries |
362,700 | 266,542 | 189,351 | |||||||||
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$ | 944,661 | $ | 762,966 | $ | 637,063 | |||||||
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The following table presents property and equipment, net for the United States and all other countries based on the geographic location of the assets for the periods presented:
December 31, | ||||||||
2013 | 2012 | |||||||
(in thousands) | ||||||||
Property and equipment, net |
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United States |
$ | 67,275 | $ | 36,255 | ||||
All other countries |
14,253 | 7,547 | ||||||
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$ | 81,528 | $ | 43,802 | |||||
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Employees
As of December 31, 2013, we had approximately 2,017 employees. Of these employees, approximately 1,146 were based in the United States. None of our employees are represented by a labor union or are subject to a collective bargaining agreement. We believe that relations with our employees are good.
Seasonality
Expenditures by travel advertisers tend to be seasonal. Traditionally, our strongest quarter has been the third quarter, which is a key travel research period, with the weakest quarter historically being the fourth quarter. However, adverse economic conditions or continued growth of our international operations with differing holiday peaks may influence the typical trend of our seasonality in the future.
Additional Information
Company Website and Public Filings
We maintain a corporate website at www.tripadvisor.com. Except as explicitly noted, the information on our website, as well as the websites of our various brands and businesses, is not incorporated by reference in this Annual Report on Form 10-K, or in any other filings with, or in any information furnished or submitted to, the SEC.
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We make available, free of charge through the Investor Relations section of our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Sections 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after they have been electronically filed with, or furnished to, the SEC.
Code of Ethics
We post our code of business conduct and ethics, which applies to all employees, including all executive officers, senior financial officers and directors, on our corporate website at www.tripadvisor.com. Our code of business conduct and ethics complies with Item 406 of SEC Regulation S-K and the rules of NASDAQ. We intend to disclose any changes to the code that affect the provisions required by Item 406 of Regulation S-K, and any waivers of the code of ethics for our executive officers, senior financial officers or directors, on our corporate website.
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Item 1A. | Risk Factors |
You should consider carefully the risks described below together with all of the other information included in this Annual Report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe are immaterial may also impair our business, results of operations or financial condition. If any of the following risks occur, our business, financial condition, operating results and cash flows could be materially adversely affected.
If we are unable to continue to increase visitors to our websites and to cost-effectively convert these visitors into repeat users or contributors, our advertising revenue could decline.
The primary asset that we use to attract traffic to our websites and convert these visitors into repeat users is the content created by users of our websites, particularly such contents volume, unique nature and organization. Our success in attracting users depends, in part, upon our continued ability to collect, create, organize and distribute high-quality, commercially valuable content in a cost-effective manner at a scale that connects consumers with content that meets their specific interests and enables them to share and interact with the content and supporting communities. If people do not perceive our products to be useful, reliable and trustworthy, we may not be able to attract or retain users or otherwise maintain or increase the frequency and duration of their engagement. There can be no assurances that we will continue to obtain content in a cost-effective manner or in a manner that timely meets rapidly changing consumer demand. Any failure to obtain such content or organize and distribute such content in any manner that will engage users could adversely affect user experiences and reduce traffic driven to our websites, which would make our websites less attractive to advertisers. Any change in the cost structure pursuant to which we obtain our content currently, or in travelers relative appreciation of user-based versus expert content or our user-based content versus other sites user-based content, could negatively impact our business and financial performance.
We derive substantially all of our revenue from advertising and any significant reduction in spending by advertisers could harm our business.
We derive substantially all of our revenue from the sale of advertising, primarily through click-based advertising and, to a lesser extent, display-based advertising. Most of our advertisers can terminate their contracts with us at will or on short notice. Our ability to grow advertising revenue with our existing or new advertising partners is dependent in large part on our ability to generate revenue for them. Advertisers will not continue to do business with us if their investment in such advertising does not generate sales leads, customers, bookings, or revenue and profit on a cost-effective basis, or if we do not deliver advertisements in an effective manner. If we are unable to remain competitive and provide value to our advertisers, they will likely stop placing ads on our websites, which would harm our revenues and business. In addition, we cannot guarantee that our current advertisers will fulfill their obligations under existing contracts, continue to advertise beyond the terms of existing contracts or enter into any additional contracts with us.
Click-based advertising accounts for the majority of our advertising revenue. Any changes we make to our business model may impact our advertising revenue in ways that we do not expect. If our partners do not receive the benefits they expect from their advertising spend with us, they may reduce their spending. In addition, if new, more effective advertising models were to emerge, there can be no assurance that we will have the ability to offer these models, or offer them in an effective manner. To the extent new technology platforms, such as smartphone and tablet computing, begin to take market share from established platforms, there can be no assurance that our existing advertising models will operate successfully on these new platforms, or work as effectively as on the desktop computer platform.
Furthermore, our CPC pricing for click-based advertising depends, in part, on competition between advertisers. If our large advertisers become less competitive with each other, merge with each other or with our competitors, focus more on per-click profit than on traffic volume, or are able to reduce CPCs, this could have an adverse impact on our CPCs which would, in turn, have an adverse effect on our business, financial condition and results of operations.
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Expenditures by advertisers also tend to be cyclical, subject to variation based on budgetary constraints, project cancellation or delay, and to reflect overall economic conditions and buying patterns. If we are unable to generate advertising revenue due to factors outside of our control, our business and financial performance would be adversely affected.
Our businesses could be negatively affected by changes in search engine algorithms and dynamics, or search engine disintermediation.
We rely heavily on Internet search engines such as Google on desktop, tablet and mobile devices, including through the purchase of travel-related keywords, to generate traffic to our websites. We obtain a significant amount of traffic via search engines and, therefore, utilize techniques such as SEO and SEM to improve our placement in relevant search queries. Search engines, including Google, frequently update and change the logic that determines the placement and display of results of a users search, such that the purchased or algorithmic placement of links to our websites can be negatively affected. Moreover, a search engine could, for competitive or other purposes, alter its search algorithms or results causing our websites to place lower in search query results. If a major search engine changes its algorithms in a manner that negatively affects our paid or unpaid search ranking, or if competitive dynamics impact the effectiveness of SEO or SEM in a negative manner, our business and financial performance would be adversely affected, potentially to a material extent. Furthermore, our failure to successfully manage our SEO and SEM strategies could result in a substantial decrease in traffic to our websites, as well as increased costs if we were to replace free traffic with paid traffic.
In addition, to the extent that Google (including Google + Local and Google Hotel Finder) and Bing (including Bing Travel), or other leading search or metasearch engines that have a significant presence in our key markets, disintermediate online travel agencies or travel content providers by offering comprehensive travel planning or shopping capabilities, or refer those leads to suppliers directly, or to other favored partners, there could be a material adverse impact on our business and financial performance. For example, during 2011, Google completed its acquisition of flight search technology company ITA Software and separately made changes to its hotel search results, including both expanding and promoting the use of Google + Local. To the extent these actions have a negative effect on our search traffic, whether on desktop, tablet or mobile devices, our business and financial performance could be adversely affected.
We rely on a relatively small number of significant advertisers and any reduction in spending by or loss of those advertisers could seriously harm our business.
We derive a substantial portion of our revenue from a relatively small number of significant advertisers. For example, for the year ended December 31, 2013, our two most significant advertising customers, Expedia and Priceline (and their subsidiaries), accounted for a combined 47% of total revenue. If any of our significant advertisers were to cease or significantly curtail advertising on our websites, we could experience a rapid decline in our revenue over a relatively short period of time.
Our success depends upon the acceptance, and successful measurement, of online advertising as an alternative to offline advertising.
We believe that a significant discrepancy exists between the percentage of the advertising market allocated to online advertising and the percentage of consumer time spent on online media consumption as opposed to offline advertising and media consumption. Long-term growth of our business will depend heavily on this distinction between online and offline advertising narrowing or being eliminated, which may not happen in a manner or to the extent that we currently expect. We compete with traditional media for advertising dollars, in addition to websites with higher levels of traffic. If online advertising ceases to be an acceptable alternative to offline advertising then our business, financial condition and results of operations will be negatively impacted.
Because the online marketing industry is relatively new and rapidly evolving, it uses different methods than traditional media to gauge its effectiveness. Some of our potential customers have little or no experience using
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the Internet for advertising and marketing purposes and have allocated only limited portions of their advertising and marketing budgets to the Internet. The adoption of Internet advertising, particularly by those entities that have historically relied upon traditional media for advertising, requires the acceptance of a new way of conducting business, exchanging information and evaluating new advertising and marketing technologies and services. As a result, we are continually evaluating changes to aspects of our business model to keep pace with the expectations of users and advertisers, and these changes may not yield the benefits we expect. In particular, we are dependent on our clients adoption of new metrics to measure the success of online marketing campaigns. We may also experience resistance from traditional advertising agencies who may be advising our clients. Any lack of growth in the market for various online advertising models could have an adverse effect on our business, financial condition and results of operations.
In addition, if advertisers materially change their transaction attribution models or their return on investment calculations and/or increase their return on investment targets with respect to online advertising in general, or TripAdvisor traffic in particular, they might reduce the prices they are willing to pay for our advertising products, which would have an adverse effect on our business, financial condition and results of operations.
Growth in the use of TripAdvisor through smartphones as a substitute for use on personal computers and tablets may negatively affect our revenue and financial results.
In general, our content was originally designed for users accessing the Internet on a desktop or laptop computer. The number of people who access the Internet through devices other than personal computers, such as smartphones and tablets, has increased substantially in the last few years and we anticipate that the rate of use of smartphone computing devices will continue to grow. Although the substantial majority of smartphone users also access and engage with our websites on personal computers and/or tablets, our users could decide to increasingly access our products primarily through smartphone devices. We have developed services and applications to address limitations of these smaller devices and our advertising revenues continue to grow, however, we monetize users of smartphone computing devices at a lower rate compared to users who access our websites through personal computers and the efficacy of the smartphone advertising market and our smartphone monetizing strategies are still developing.
Additionally, as new devices and new platforms are continually being released, it is difficult to predict the challenges that we may encounter in developing versions of our offerings for use on these alternative devices, and we may need to devote significant resources to the creation, support, and maintenance of our services on such devices. If users continue to increasingly access our smartphone products as a substitute for access through personal computers and/or tablets, and if we are unable to successfully improve monetization strategies for our smartphone users, our revenue and financial results may be negatively affected.
Declines or disruptions in the travel industry could adversely affect our businesses and financial performance.
Our businesses and financial performance are affected by the health of the worldwide travel industry. Travel expenditures are sensitive to personal and business discretionary spending levels and tend to decline or grow more slowly during economic downturns. Decreased travel expenditures could reduce the demand for our services, thereby causing a reduction in revenue.
In 2008, domestic and global economic conditions deteriorated rapidly, resulting in increased unemployment and a reduction in available budgets for both business and leisure travelers, which slowed spending on the services that we provide. The global economy remains in a fragile state and may be adversely impacted by a number of negative economic developments including defaults on government debt, significant increases in fuel and energy costs, tax increases and other matters that could reduce discretionary spending, continued tightening of credit markets, further declines in consumer confidence, and policy missteps. Further weakness in the global economy could create uncertainty for travelers and suppliers, and result in reduced spending by advertisers. These conditions could have a material adverse impact on our business and financial performance.
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We rely on the value of our brand and consumer trust in our brand. If we are not able to maintain and enhance our brand, or if events occur that damage our reputation and brand, our business may be harmed.
We believe that the TripAdvisor brand has contributed significantly to our success and that maintaining and enhancing our brand is critical to expanding our base of users, creating content and attracting advertisers. As a result, we invest significantly in brand marketing including, most recently, television. We expect these investments to continue, or even increase, as a result of a variety of factors, including increased spending from competitors, the increasing costs of supporting multiple brands, expansion into geographies and products where our brands are less well known, inflation in media pricing, and the continued emergence and relative traffic share growth of search engines as destination sites for travelers. Such efforts may not maintain or enhance consumer awareness of our brands and, even if we are successful in our branding efforts, such efforts may not be cost-effective or as efficient as they have been historically. If we are unable to maintain or enhance consumer awareness of our brands or to generate demand in a cost-effective manner, it would have a material adverse effect on our business and financial performance.
We receive significant media coverage in our various geographic markets. Unfavorable publicity regarding, for example, our privacy practices, product changes, the accuracy of user-generated content, product quality, litigation or regulatory activity could adversely affect our reputation with our site users and our advertisers. Such negative publicity also could have an adverse effect on the size, engagement, and loyalty of our user base and result in decreased revenue, which could adversely affect our business and financial results.
Intense competition could reduce our market share and harm our financial performance.
The market for the travel services we offer is intensely competitive. We face competition from a number of different sources and many of our competitors have significantly greater and more diversified resources than we do and may be able to leverage other aspects of their business to enable them to compete more effectively against us. More specifically:
| We currently face competition from travel service providers such as major hotel companies, airlines and rental car companies, many of which have their own websites to which they drive business. For example, several major hotel companies launched an online hotel reservation service with a stated goal of driving consumers directly to their brand websites thereby reducing the share receive by online travel agents. They may also attempt to improve their competitive position by offering lower room rates, better room availability or additional features or amenities through this reservation service than are available through services like ours. |
| We currently face competition from online travel agents, such as Expedia and Priceline (and their subsidiaries), and this competition may increase to the extent that these online travel agents accumulate and develop a comprehensive offering of travel-related reviews and resources. The barriers to entry for these companies may be limited given their access to travel-related information and relationships with consumers. |
| We face increased competition from the large search engines and social networking sites, companies, such as Google and Facebook, or other companies, which competition will only increase should they chose to compete more directly with us in the travel review space, and create commercially valuable online content at significant scale. For example, Google + Local, with its aggregated reviews and local recommendations, competes with us and Googles access to more comprehensive data regarding user search queries through its search algorithms gives it a significant competitive advantage over other companies in the industry, including us. In addition, if significant numbers of users adopt Facebooks newly released Graph Search to get travel recommendations, it could have the effect of reducing traffic and user engagement on TripAdvisor. |
| We also face competition from travel agencies, wholesalers and travel operators as well as operators of travel industry reservation databases such as Galileo, Travelport, Amadeus and Sabre. |
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| In addition, we compete with newspapers, magazines and other traditional media companies that provide offline and online advertising opportunities. |
| For our vacation rental business, we also face competition from several companies, including HomeAway and Airbnb, some of whom have a larger inventory of rooms available than we do. |
Many of our competitors have significantly greater financial, technical, marketing and other resources compared to us and have expertise in developing online commerce and facilitating Internet traffic as well as large client bases. We expect to face additional competition as other established and emerging companies enter the travel advertising market.
Certain of the companies we do business with, including some of our click-based advertising partners, are also our competitors. The consolidation of our competitors and partners, including Expedia (through its investment in Trivago) and Priceline (through its acquisition of Kayak), may affect our relative competitiveness and our partner relationships. Competition and consolidation could result in higher traffic acquisition costs, reduced margins on our advertising services, loss of market share, reduced customer traffic to our websites and reduced advertising by travel companies on our websites. For example, Google (through its launch of Google Hotel Finder, evolution and expansion of Google + Local and preferred top placement of Places results in Google organic travel search results) and Microsofts Bing (through its launch of Bing Travel), have each taken steps to appeal more directly to travel customers, which could lead to diversion of customer traffic to their own websites or those of a favored partner, or undermine our ability to obtain prominent placement in paid or unpaid search results at a reasonable cost, or at all. Competition in our industry may result in pricing pressure, loss of market share or decreased member engagement, any of which could adversely affect our business and financial performance.
As a distributor and host of Internet content, we face potential liability and expense for legal claims based on the nature and content of the materials that we distribute or create, or that are accessible via our websites.
As a distributor and host of original content and user-generated content, we face potential liability based on a variety of theories, including defamation, libel, negligence, copyright or trademark infringement or other legal theories based on the nature, creation or distribution of this information, and under various laws, including the Lanham Act, the Copyright Act, the Federal Trade Commission Act, and the Digital Millennium Copyright Act. We may also be exposed to similar liability in connection with content that users post to our websites through forums, blogs, comments, and other social media features. In addition, it is possible that visitors to our websites could make claims against us for losses incurred in reliance upon information provided via our websites. These claims, whether brought in the United States or abroad, could divert management time and attention away from our business and result in significant costs to investigate and defend, regardless of the merit of these claims. If we become subject to these or similar claims and are not successful in our defense, we may be forced to pay substantial damages. There is no guarantee that we will avoid future liability and potential expenses for legal claims based on the content available on our websites. Should the content distributed through our websites violate the rights of others or otherwise give rise to claims against us, we could be subject to substantial liability, which could have a negative impact on our business and financial performance.
Loss of trust in our brand would harm our reputation and adversely affect our business, financial condition and results of operations. Our success depends on attracting a large number of users to our websites, and retaining such users, and providing leads and clicks to advertisers. In order to attract and retain users, we must remain a valuable source of travel advice. Because of our reliance on user-generated content, we must continually manage and monitor our content and detect incorrect or fraudulent information. For example, hotels, hotel competitors, or others, in an attempt to improperly influence a hotels reviews and rankings, sometimes write and submit fraudulent or otherwise misleading reviews. If a significant amount of inaccurate or fraudulent information were not detected and removed by us in a timely manner, or if a significant amount of information
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was deemed by users or the media to be inaccurate or fraudulent, our brand, business and reputation could be harmed. Any damage to our reputation could harm our ability to attract and retain users, employees and advertisers, which would adversely affect our business and financial performance. In addition, significant adverse news reports or media, industry or consumer coverage of us would reflect poorly on our brands and could have an adverse effect on our business and financial performance.
We are dependent upon the quality of traffic in our network to provide value to online advertisers, and any failure in our quality control could have a material adverse effect on the value of our websites to our advertisers and adversely affect our revenue.
We use technology and processes to monitor the quality of and to identify any anomalous metrics associated with, the Internet traffic that we deliver to online advertisers. These metrics may be indicative of low quality clicks such as non-human processes, including robots, spiders or other software; the mechanical automation of clicking; and other types of invalid clicks or click fraud. Even with such monitoring in place, there is a risk that a certain amount of low-quality traffic, or traffic that online advertisers deem to be invalid, will be delivered to such online advertisers. As a result, we may be required to credit amounts owed to us by our advertisers. Furthermore, low-quality or invalid traffic may be detrimental to our relationships with advertisers, and could adversely affect our advertising pricing and revenue.
We rely on assumptions and estimates and data from third parties to calculate certain of our key metrics, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.
Certain key metrics, such as the number of our active users, unique visitors, total traffic and number of reviews and opinions, are calculated, in some cases, using internal company data and, in other cases, relying on data from third parties. While these numbers are based on what we believe to be reasonable calculations for the applicable periods of measurement, there are inherent challenges in measuring usage and user engagement across our large user base around the world. For example, a single person or user may have multiple accounts or browse the internet on multiple browsers, some mobile applications automatically contact our servers for regular updates with no user action and we are not able to capture user information on all of our platforms. As such, the calculations of our active users and unique visitors may not accurately reflect the number of people actually using our platforms. In addition, our measures of user growth and user engagement may differ from estimates published by third parties or from similar metrics of our competitors due to differences in methodologies utilized by us and the third parties for which we rely on this data.
We are continually seeking to improve our ability to estimate these key metrics. We regularly review and adjust our processes for calculating our internal metrics to improve their accuracy. If our users, advertisers, partners and shareholders do not perceive our metrics to be accurate representations or if we discover material inaccuracies in our user metrics, our reputation may be harmed. In which case, users may not use our products and services and advertisers and partners may be less willing to allocate their budgets to our products and services which could negatively affect our business and operating results.
We rely on information technology to operate our business and maintain competitiveness, and any failure to adapt to technological developments or industry trends could harm our businesses.
We depend on the use of sophisticated information technologies and systems. As our operations grow in size and scope, we must continuously improve and upgrade our systems and infrastructure while maintaining or improving the reliability and integrity of our systems and infrastructure. Our future success also depends on our ability to adapt our services and infrastructure to meet rapidly evolving consumer trends and demands while continuing to improve the performance, features and reliability of our services in response to competitive service and product offerings. The emergence of alternative platforms such as smartphone and tablet computing devices and the emergence of niche competitors who may be able to optimize products, services or strategies for such platforms will require new investment in technology. New developments in other areas, such as cloud computing,
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could also make it easier for competition to enter our markets due to lower up-front technology costs. In addition, we may not be able to maintain our existing systems or replace or introduce new technologies and systems as quickly as we would like or in a cost-effective manner.
If we do not continue to innovate and provide tools and services that are useful to travelers, we may not remain competitive, and our business and financial performance could suffer.
Our success depends in part on continued innovation to provide features and services that make our websites and smartphone and tablet computing applications useful for travelers. Our competitors are continually developing innovations in online travel-related services and features. As a result, we are continually working to improve our business model and user experience in order to drive user traffic and conversion dates. We can give no assurances that the changes we make will yield the benefits we expect and will not have adverse impacts that we did not anticipate. If we are unable to continue offering innovative products and services and quality features that travelers want to use, existing users may become dissatisfied and use a competitors offerings and we may be unable to attract additional users, which could adversely affect our business and financial performance.
New technologies could block our ads, which would harm our business.
Technologies have been developed that can block the display of online ads and that provide tools to users to opt out of some web-based advertising products. We derive most of our revenues from fees paid to us by advertisers in connection with the display of ads on web pages for our users. As a result, these technologies and tools could adversely affect our business and financial performance.
Our culture emphasizes rapid innovation and prioritizes user engagement over short-term financial results.
We have a culture that encourages rapid development and release of new and improved products, which may at times result in unintended consequences or decisions that are poorly received by users or advertisers. Our culture also prioritizes user engagement, or website stickiness, over short-term financial results. We have taken actions in the past and may continue to make product decisions going forward that have the effect of reducing our short-term revenue or profitability if we believe that the decisions benefit the aggregate user experience and/or conversion rates and CPC pricing, and will thereby improve our financial performance over the long-term. The short-term reductions in revenue or profitability could be more severe than we anticipate. These decisions may not produce the long-term benefits that we expect, in which case our user growth and engagement, our relationships with users and advertisers, and our business and results of operations could be harmed.
The online vacation rental market is rapidly evolving and if we fail to predict the manner in which the market develops, our business and prospects may suffer.
We offer vacation rental services through our U.S.-based FlipKey and European-based Holiday Lettings and Niumba businesses, as well through various partnerships. The online vacation rental market is relatively new and rapidly evolving in many respects, including acceptance of the business model by travelers, property owners and property managers; from a business and marketing perspective as well as the regulatory environment. We operate in various disparate jurisdictions and markets and have limited insight into trends that may develop in those markets and may affect our business. Since we began offering such services, there have been and continue to be significant business, marketing and regulatory developments. Operating in new and untested jurisdictions requires significant management attention and financial resources. We cannot assure that our expansion efforts will be successful, and the investment and additional resources required to establish operations and manage growth may not produce the desired levels of revenue or profitability.
If we fail to attract and maintain a critical mass of vacation rental listings and travelers, our vacation rental marketplaces will become less valuable and this may have a negative impact on our business.
In our vacation rental business, revenue is generated when either owners or managers of vacation rental properties pay us fees to list and market vacation rental properties to users who visit the websites comprising our
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marketplace or owners and/or travelers pay us fees upon booking a transaction. As a result, our success in this area primarily depends on our ability to attract owners, managers, travelers and advertisers to our marketplace. If property owners and managers do not perceive the benefits of marketing their properties through our websites, or elect to list them with a competitor instead of listing with us, our volume of new listings and listing renewals may suffer. As a result, we may be unable to offer a sufficient supply and variety of vacation properties to attract travelers to our websites. A larger competitor already exists in the vacation rental space, with significantly more users and listed properties, and new competitors with significant financial resources are continually emerging.
We may be subject to claims that we violated intellectual property rights of others, which claims can be extremely costly to defend and could require us to pay significant damages and limit our ability to operate.
Companies in the Internet and technology industries, and other patent and trademark holders seeking to profit from royalties in connection with grants of licenses, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. We have received in the past, and may in the future receive, notices that claim we have misappropriated or misused other parties intellectual property rights. There may be intellectual property rights held by others, including patents, copyrighted works and/or trademarks, which cover significant aspects of our technologies or content. Any intellectual property claim against us, regardless of merit, could be time consuming and expensive to settle or litigate and could divert managements attention and other resources. These claims also could subject us to significant liability for damages and could result in our having to stop using technology or content found to be in violation of another partys rights. We might be required or may opt to seek a license for rights to intellectual property held by others, which may not be available on commercially reasonable terms, or at all. Even if a license is available, we could be required to pay significant royalties, which would increase our operating expenses. We may also be required to develop alternative non-infringing technology, or content, which could require significant effort and expense and make us less competitive in the relevant market. Any of these results could harm our business and financial performance.
We may have future capital needs and may not be able to obtain additional financing on acceptable terms.
We are party to a term loan in the amount of $400 million, as well as a revolving credit facility of $200 million. These arrangements may limit our ability to secure significant additional financing in the future on favorable terms or our operating cash flow may be insufficient to satisfy our financial obligations under indebtedness outstanding from time to time. Our ability to secure additional financing and satisfy our financial obligations under indebtedness outstanding from time to time will depend upon our future operating performance, which is subject to then prevailing general economic and credit market conditions, including interest rate levels and the availability of credit generally, and financial, business and other factors, many of which are beyond our control. In light of periodic uncertainty in the capital and credit markets, there can be no assurance that sufficient financing will be available on desirable or even any terms to fund investments, acquisitions, stock repurchases, dividends, debt refinancing or extraordinary actions or that counterparties in any such financings would honor their contractual commitments. If financing is not available when needed or is not available on favorable terms, we may be unable to issue or develop new or enhanced existing services, complete acquisitions, repurchase equity or otherwise take advantage of business opportunities, any of which could have a material adverse effect on our business, financial condition and results of operations. If we raise additional funds through the issuance of equity securities, our stockholders may experience significant dilution.
Furthermore, we are also accumulating a greater portion of our cash flows in foreign jurisdictions than previously. The repatriation of such funds for use in the United States, including for corporate purposes such as acquisitions, stock repurchases, dividends or debt refinancings, may result in additional U.S. income tax expense and higher cost for such capital.
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We have significant indebtedness, which could adversely affect our business and financial condition.
The face value of our term loan totals $400 million. Risks relating to our indebtedness include:
| Increasing our vulnerability to general adverse economic and industry conditions; |
| Requiring us to dedicate a portion of our cash flow from operations to principal and interest payments on our indebtedness, thereby reducing the availability of cash flow to fund working capital, capital expenditures, acquisitions and investments and other general corporate purposes; |
| Making it more difficult for us to optimally capitalize and manage the cash flow for our businesses; |
| Limiting our flexibility in planning for, or reacting to, changes in our businesses and the markets in which we operate; |
| Possibly placing us at a competitive disadvantage compared to our competitors that have less debt; |
| Limiting our ability to borrow additional funds or to borrow funds at rates or on other terms that we finds acceptable; and |
| Exposing us to the risk of increased interest rates because our outstanding debt is expected to be subject to variable rates of interest. |
In addition, it is possible that we may need to incur additional indebtedness in the future in the ordinary course of business. The terms of our term loan and revolving credit facility will allow us to incur additional debt subject to certain limitations. If new debt is added to current debt levels, the risks described above could intensify.
The agreements that govern our credit facility contain various covenants that limit our discretion in the operation of our business and also require us to meet financial maintenance tests and other covenants. The failure to comply with such tests and covenants could have a material adverse effect on us.
We are party to a credit agreement providing for a revolving credit facility with a borrowing capacity of $200 million and a term of five years, as well as a five-year, $400 million term loan to TripAdvisor Holdings, LLC. The agreements that govern the term loan and revolving credit facility contain various covenants, including those that limit our ability to, among other things:
| Incur indebtedness; |
| Pay dividends on, redeem or repurchase our capital stock; |
| Enter into certain asset sale transactions, including partial or full spin-off transactions; |
| Enter into secured financing arrangements; |
| Enter into sale and leaseback transactions; and |
| Enter into unrelated businesses. |
These covenants may limit our ability to optimally operate our business. In addition, our term loan and revolving credit facility require that we meet certain financial tests, including an interest coverage test and a leverage ratio test. Any failure to comply with the restrictions of our term loan credit facility may result in an event of default under the agreements governing such facilities. Such default may allow the creditors to accelerate the debt incurred under thereunder. In addition, lenders may be able to terminate any commitments they had made to supply us with further funds (including periodic rollovers of existing borrowings).
If the Spin-Off, together with certain related transactions, were to fail to qualify as a transaction that is generally tax free for U.S. federal income tax purposes, we could be subject to significant tax liabilities.
As a condition to the completion of the Spin-Off, Expedia obtained a private letter ruling from the Internal Revenue Service, or the IRS, along with an opinion of counsel, satisfactory to the Expedia Board of Directors
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regarding the qualification of the Spin-Off, together with certain related transactions, as a transaction that is generally tax free for U.S. federal income tax purposes under Sections 355 and 368(a) (1) (D) of the Internal Revenue Code of 1986, as amended, or the Code. The IRS private letter ruling and the opinion of counsel were based on, among other things, certain facts, assumptions as well as the accuracy of certain representations, statements and undertakings that Expedia and we made to the IRS and to counsel. If any of these representations, statements or undertakings are, or become, inaccurate or incomplete, or if we or Expedia breach any of the covenants, the IRS private letter ruling and the opinions of counsel may be invalid.
Moreover, the IRS private letter ruling does not address all the issues that are relevant to determining whether the Spin-Off qualifies as a transaction that is generally tax free for U.S. federal income tax purposes. Notwithstanding the IRS private letter ruling and/or the opinion of counsel, the IRS could determine that the Spin-Off should be treated as a taxable transaction if it determines that any of the representations, assumptions or undertakings that were included in the request for the IRS private letter ruling or on which the opinion of counsel was based is false or has been violated or if it disagrees with the conclusions in the opinion of counsel that are not covered by any IRS ruling.
Under the Tax Sharing Agreement between us and Expedia, we are generally required to indemnify Expedia for any taxes resulting from the Spin-Off (and any related interest, penalties, legal and professional fees, and all costs and damages associated with related stockholder litigation or controversies) to the extent such amounts resulted from (i) any act or failure to act by us described in the covenants in the tax sharing agreement, (ii) any acquisition of our equity securities or assets or those of a member of our group, or (iii) any failure of the representations with respect to us or any member of our group to be true or any breach by us or any member of our group of any covenant, in each case, which is contained in the separation documents or in the documents relating to the IRS private letter ruling and/or the opinion of counsel.
If we fail to manage our growth effectively, our brand, results of operations and business could be harmed.
We have experienced rapid growth in our headcount and operations, which places substantial demands on management and our operational infrastructure. We have also consummated a number of acquisitions which have increased our headcount, operations and locations. We intend to make substantial investments in our technology, sales and marketing and community management organizations. We also intend to continue to explore acquisitions. As we continue to grow, we must effectively integrate, develop and motivate a large number of new employees, including employees in international markets, while maintaining the beneficial aspects of our company culture. If we do not manage the growth of our business and operations effectively, the quality of our platform and efficiency of our operations could suffer, which could harm our brand, results of operations and business.
Our international operations involve additional risks and our exposure to these risks will increase as our business expands globally.
We operate in a number of jurisdictions outside of the United States and intend to continue to expand our international operations. To achieve widespread acceptance in new countries and markets, we must continue to tailor our services and business model to the unique circumstances of such countries and markets, which can be difficult, costly and divert management and personnel resources. Failure to adapt practices and models effectively to each country into which we expand could slow our international growth.
We have businesses operating in China, which create particular risks and uncertainties relating to the laws in China. We operate in China under the brands daodao.com and kuxun.cn. The success of these businesses, and of any future investments in China, is subject to risks and uncertainties regarding the application, development and interpretation of Chinas laws and regulations.
The laws and regulations of China restrict foreign investment in areas including air-ticketing and travel agency services, Internet content provision, mobile communication and related businesses. Although we have
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established effective control of our Chinese businesses through a series of agreements, future developments in the interpretation or enforcement of Chinese laws and regulations or a dispute relating to these agreements could restrict our ability to operate or restructure these businesses or to engage in strategic transactions.
Other risks faced by us as a result of our international operations, including our operations in China, include:
| Political instability; |
| Threatened or actual acts of terrorism; |
| Regulatory requirements, including the Foreign Corrupt Practices Act and U.K. Bribery Act, data privacy requirements, labor laws and anti-competition regulations; |
| Ability to comply with additional U.S. laws applicable to U.S. companies operating internationally as well as local laws and regulations; |
| Diminished ability to legally enforce contractual rights; |
| Increased risk and limits on enforceability of intellectual property rights; |
| Possible preferences by local populations for local providers; |
| Restrictions on, or adverse consequences related to, the withdrawal of non-U.S. investment and earnings; |
| Currency exchange restrictions, particularly conversion of the U.S. dollar into Chinese renminbi; |
| Restrictions on repatriation of cash as well as restrictions on investments in operations in certain countries; |
| Financial risk arising from transactions in multiple currencies; |
| Slower adoption of the Internet as an advertising, broadcast and commerce medium in certain of those markets as compared to the United States; |
| Difficulties in managing staffing and operations due to distance, time zones, language and cultural differences; and |
| Uncertainty regarding liability for services, content and intellectual property rights, including uncertainty as a result of local laws and lack of precedent. |
The loss of one or more of our key personnel, or our failure to attract and retain other highly qualified personnel in the future, could harm our business.
Our future success depends upon the continued contributions of our senior corporate management and other key employees. In particular, the contributions of Stephen Kaufer, our President and Chief Executive Officer, are critical to our overall management. We cannot ensure that we will be able to retain the services of these individuals, and the loss of one or more of our key personnel could seriously harm our business. We do not maintain any key person life insurance policies.
In addition, competition remains intense for well-qualified employees in certain aspects of our business, including software engineers, developers, product management and development personnel, and other technology professionals. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate existing employees. If we do not succeed in attracting well-qualified employees or retaining or motivating existing employees, our business would be adversely affected.
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Changing laws, rules and regulations and legal uncertainties may adversely affect our business or financial performance.
Our business and financial performance could be adversely affected by unfavorable changes in or interpretations of existing laws, rules and regulations or the promulgation of new laws, rules and regulations applicable to us and our business, including those relating to the Internet and online commerce, Internet advertising, consumer protection and privacy. Unfavorable changes could decrease demand for products and services, limit marketing methods and capabilities, increase costs and/or subject us to additional liabilities.
For example, there is, and will likely continue to be, an increasing number of laws and regulations pertaining to the Internet and online commerce that may relate to liability for information retrieved from or transmitted over the Internet, online editorial and user-generated content, user privacy, behavioral targeting and online advertising, taxation, liability for third-party activities and the quality of products and services. Our current business partner arrangements with third parties, including Facebook, could be negatively impacted to the extent that more restrictive privacy laws or regulations are enacted, particularly in the United States or European Union. In addition, enforcement authorities in the United States continue to rely on their authority under existing consumer protection laws to take action against companies relating to data privacy and security practices. The growth and development of online commerce may prompt calls for more stringent consumer protection laws and more aggressive enforcement efforts, which may impose additional burdens on online businesses generally.
Liberty Interactive Corporation currently is a controlling shareholder.
Liberty Interactive Corporation, or Liberty, effectively controls the outcome of all matters submitted to a vote or for the consent of our stockholders (other than with respect to the election by the holders of our common stock of 25% of the members of our Board of Directors and matters as to which Delaware law requires separate class votes). Libertys control of us, as well as the existing provisions of our organizational documents and Delaware law, may discourage or prevent a change of control of us, which may reduce the market price of our common stock.
Our effective tax rate is impacted by a number of factors that could have a material impact on our financial results and could increase the volatility of those results.
Due to the global nature of our business, we are subject to income taxes in the United States and other foreign jurisdictions. In the event we incur net income in certain jurisdictions but incur losses in other jurisdictions, we generally cannot offset the income from one jurisdiction with the loss from another, which could increase our effective tax rate. Furthermore, significant judgment is required to calculate our worldwide provision for income taxes. In the ordinary course of our business there are many transactions and calculations where the ultimate tax determination is uncertain. By virtue of our previously filed separate company and consolidated income tax returns with Expedia we are routinely under audit by federal, state and foreign taxing authorities. Although we believe our tax estimates are reasonable, the final determination of audits could be materially different from our historical income tax provisions and accruals. The results of an audit could have a material effect on our financial position, results of operations, or cash flows in the period or periods for which that determination is made.
Additionally, we earn an increasing portion of our income, and accumulate a greater portion of cash flow, in foreign jurisdictions. Any repatriation of funds currently held in foreign jurisdictions may result in higher effective tax rates and incremental cash tax payments. In addition, there have been proposals to amend U.S. tax laws that would significantly impact the manner in which U.S. companies are taxed on foreign earnings. Although we cannot predict whether or in what form any legislation will pass, if enacted, it could have a material adverse impact on our U.S. tax expense and cash flows.
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We cannot be sure that our intellectual property is protected from copying or use by others, including potential competitors.
Our websites rely on content, brands and technology, much of which is proprietary. We protect our proprietary content, brands and technology by relying on a combination of trademarks, copyrights, trade secrets, patents and confidentiality agreements. In connection with our license agreements with third parties, we seek to control access to, and the use and distribution of, proprietary technology, content and brands. Even with these precautions, it may be possible for another party to copy or otherwise obtain and use our proprietary technology, content or brands without authorization or to develop similar technology, content or brands independently. Effective trademark, copyright, patent and trade secret protection may not be available in every jurisdiction in which our services are made available, and policing unauthorized use of our proprietary technology, content and brands is difficult and expensive. Therefore, in certain jurisdictions, we may be unable to protect our proprietary technology, content and brands adequately against unauthorized third-party copying or use, which could adversely affect our business or ability to compete. We cannot be sure that the steps we have taken will prevent misappropriation or infringement of proprietary technology, content or brands. Any misappropriation or violation of our rights could have a material adverse effect on our business. Furthermore, we may need to go to court or other tribunals to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. These proceedings might result in substantial costs and diversion of resources and management attention. Our failure to protect our intellectual property in a cost-effective or effective manner could have a material adverse effect on our business and ability to protect our technology, content and brands.
We currently license from third parties and incorporate the technologies and content into our websites. As we continue to introduce new services that incorporate new technologies and content, we may be required to license additional technology, or content. We cannot be sure that such technology or content will be available on commercially reasonable terms, if at all.
We are subject to foreign exchange risk.
We conduct a significant and growing portion of our business outside the United States. As a result, we face exposure to movements in currency exchange rates, particularly those related to the Euro, British pound sterling, Singapore dollar and Chinese renminbi. These exposures include, but are not limited to re-measurement gains and losses from changes in the value of foreign denominated assets and liabilities; translation gains and losses on foreign subsidiary financial results that are translated into U.S. dollars upon consolidation; and planning risk related to changes in exchange rates between the time we prepare our annual and quarterly forecasts and when actual results occur.
Depending on the size of the exposures and the relative movements of exchange rates, if we were to choose not to hedge or were to fail to hedge effectively our exposure, we could experience a material adverse effect on our financial statements and financial condition. As seen in some recent periods, in the event of severe volatility in exchange rates the impact of these exposures can increase, and the impact on results of operations can be more pronounced. In addition, the current environment and the increasingly global nature of our business have made hedging these exposures both more complex and costly. We hedge certain short-term foreign currency exposures with the purchase of forward exchange contracts. These hedge contracts only help mitigate the impact of changes in foreign currency rates that occur during the term of the related contract period and carry risks of counter-party failure. There can be no assurance that our hedges will have their intended effects.
System interruption and the lack of redundancy in some of our internal information systems may harm our business.
We rely on computer systems to deliver content and services. We have experienced and may in the future experience system interruptions that make some or all of these systems unavailable or prevent us from efficiently fulfilling orders or providing content and services to users and third parties. Significant interruptions, outages or
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delays in internal systems, or systems of third parties that we rely upon including multiple co-location providers for data centers and network access, or deterioration in the performance of any such systems, would impair our ability to process transactions or display content and decrease the quality of the services we offer to travelers and users. These interruptions could include security intrusions and attacks on our systems for fraud or service interruption (called denial of service or bot attacks). If we were to experience frequent or persistent system failures, our business, reputations and brand could be harmed.
In addition, we lack backup systems or contingency plans for certain critical aspects of our operations or business processes. Many other systems are not fully redundant and their disaster recovery or business continuity planning may not be sufficient. Fire, flood, power loss, telecommunications failure, break-ins, earthquakes, acts of war or terrorism, acts of God, computer viruses, electronic intrusion attempts from both external and internal sources and similar events or disruptions may damage or impact or interrupt computer or communications systems or business processes at any time. Although we have put measures in place to protect certain portions of our facilities and assets, any of these events could cause system interruption, delays and loss of critical data, and could prevent us from providing content and services to users, travelers and/or third parties for a significant period of time. Remediation may be costly and we may not have adequate insurance to cover such costs. Moreover, the costs of enhancing infrastructure to attain improved stability and redundancy may be time consuming and expensive and may require resources and expertise that are difficult to obtain.
Our processing, storage and use personal information and other data exposes us to risks stemming external and internal security breaches and failure to comply with governmental regulation, which could give rise to liabilities.
There are numerous laws regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other consumer data, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules. We strive to comply with all applicable laws, policies, legal obligations and industry codes of conduct relating to privacy and data protection. Any failure or perceived failure by us to comply with our privacy policies, privacy-related obligations to users or other third parties, or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other user data, may result in governmental enforcement actions, litigation or public statements that could harm our reputation and cause our customers and members to lose trust in us, which could have an adverse effect on our business, brand, market share and results of operations.
The regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future. Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the Internet have recently come under increased public scrutiny. The U.S. Congress and federal agencies, including the Federal Trade Commission and the Department of Commerce, are reviewing the need for greater regulation for the collection and use of information concerning consumer behavior on the Internet. U.S. courts are also considering the applicability of existing federal and state statutes, including computer trespass and wiretapping laws, to the collection and exchange of information online. In addition, the European Union is in the process of proposing reforms to its existing data protection legal framework, which may result in a greater compliance burden for companies, including us, with users in Europe and increased costs of compliance.
Potential security breaches to our systems, whether resulting from internal or external sources, could significantly harm our business. A party, whether internal or external, that is able to circumvent our security systems could misappropriate user information or proprietary information or cause significant interruptions in our operations. In the past, we have experienced denial-of-service type attacks on our systems that have made portions of our websites unavailable for short periods of time as well as unauthorized access of our systems and data. We may need to expend significant resources to protect against security breaches or to address problems
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caused by breaches, and reductions in website availability could cause a loss of substantial business volume during the occurrence of any such incident. Because the techniques used to sabotage security change frequently, often are not recognized until launched against a target and may originate from less regulated and remote areas around the world, we may be unable to proactively address these techniques or to implement adequate preventive measures. Security breaches could result in negative publicity, damage to reputation, exposure to risk of loss or litigation and possible liability due to regulatory penalties and sanctions. Security breaches could also cause travelers and potential users to lose confidence in our security, which would have a negative effect on the value of our brand. Failure to adequately protect against attacks or intrusions, whether for our own systems or systems of vendors, could expose us to security breaches that could have an adverse impact on financial performance.
We also face risks associated with security breaches affecting third parties conducting business over the Internet. Much of our business is conducted with third party marketing affiliates, which may generate travel reservations through our infrastructure or through our systems. In addition, we frequently use third parties to process credit card payments. A security breach at such third party could be perceived by consumers as a security breach of our systems and could result in negative publicity, damage our reputation, expose us to risk of loss or litigation and possible liability and subject us to regulatory penalties and sanctions. In addition, such third parties may not comply with applicable disclosure requirements, which could expose us to liability.
If the businesses we have acquired or invested in do not perform as expected or we are unable to effective integrate acquired businesses, our operating results and prospects could be harmed.
We have acquired a number of businesses in the past, and our future growth may depend, in part, on future acquisitions, any of which could be material to our financial condition and results of operations. Certain financial and operational risks related to acquisitions that may have a material impact on our business are:
| Use of cash resources and incurrence of debt and contingent liabilities in funding acquisitions may limit other potential uses of our cash, including stock repurchases, dividend payments and retirement of outstanding indebtedness; |
| Use of cash resources and incurrence of debt and contingent liabilities in funding acquisitions may limit other potential uses of our cash, including stock repurchases, dividend payments and retirement of outstanding indebtedness; |
| Amortization expenses related to acquired intangible assets and other adverse accounting consequences; |
| Expected and unexpected costs incurred in identifying and pursuing acquisitions, and performing due diligence on potential acquisition targets that may or may not be successful; |
| Diversion of managements attention or other resources from our existing business; |
| Difficulties and expenses in integrating the operations, products, technology, privacy protection systems, information systems or personnel of the acquired company; |
| Impairment of relationships with employees, suppliers and affiliates of our business and the acquired business; |
| The assumption of known and unknown debt and liabilities of the acquired company; |
| Failure of the acquired company to achieve anticipated traffic, revenues, earnings or cash flows or to retain key management or employees; |
| Failure to generate adequate returns on acquisitions and investments; |
| Entrance into markets in which we have no direct prior experience and increased complexity in our business; |
| Impairment of goodwill or other intangible assets such as trademarks or other intellectual property arising from acquisitions; and |
| Adverse market reaction to acquisitions. |
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Moreover, we rely heavily on the representations and warranties provided to us by the sellers of acquired companies, including as they relate to creation, ownership and rights in intellectual property and compliance with laws and contractual requirements. Our failure to address these risks or other problems encountered in connection with past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities and harm our business generally.
We are currently relying on the controlled company exemption under NASDAQ Stock Market Listing Rules, pursuant to which controlled companies are exempt from certain corporate governance requirements otherwise applicable under NASDAQ listing rules.
The NASDAQ Stock Market Listing Rules exempt controlled companies, or companies of which more than 50% of the voting power is held by an individual, a group or another company, from certain corporate governance requirements, including those requirements that:
| A majority of the Board of Directors consist of independent directors; |
| Compensation of officers be determined or recommended to the Board of Directors by a majority of its independent directors or by a compensation committee comprised solely of independent directors; and |
| Director nominees be selected or recommended to the Board of Directors by a majority of its independent directors or by a nominating committee that is composed entirely of independent directors. |
We currently rely on the controlled company exemption from the above requirements. Accordingly, our stockholders will not be afforded the same protections generally as stockholders of other NASDAQ-listed companies with respect to corporate governance for so long as we rely on these exemptions from the corporate governance requirements.
If we are unable to successfully maintain effective internal control over financial reporting, investors may lose confidence in our reported financial information and our stock price and business may be adversely impacted.
As a public company, we are required to maintain internal control over financial reporting and our management is required to evaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal year. Additionally, we are required to disclose in our Annual Reports on Form 10-K our managements assessment of the effectiveness of our internal control over financial reporting and a registered public accounting firms attestation report on this assessment. If we are not successful in maintaining effective internal control over financial reporting, there could be inaccuracies or omissions in the consolidated financial information we are required to file with the SEC. Additionally, even if there are no inaccuracies or omissions, we could be required to publicly disclose the conclusion of our management that our internal control over financial reporting or disclosure controls and procedures are not effective. These events could cause investors to lose confidence in our reported financial information, adversely impact our stock price, result in increased costs to remediate any deficiencies, attract regulatory scrutiny or lawsuits that could be costly to resolve and distract managements attention, limit our ability to access the capital markets or cause our stock to be delisted from The NASDAQ Global Select Market or any other securities exchange on which we are then listed.
The market price and trading volume of our common stock may be volatile and may face negative pressure.
Our stock price has experienced, and could continue to experience in the future, substantial volatility. The market price of our common stock is affected by a number of factors, including the risk factors described in this section and other factors beyond our control. Factors affecting the trading price of our common stock could include:
| Quarterly variations in our or our competitors results of operations; |
| Changes in earnings estimates or recommendations by securities analysts; |
| Failure to meet market expectations; |
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| The announcement of new products or product enhancements by us or our competitors; |
| Repurchases of our common stock pursuant to our share repurchase program which could also cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock; |
| Developments in our industry, including changes in governmental regulations; and |
| General market conditions and other factors, including factors related to our operating performance or the operating performance of our competitors. |
Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations and general economic, political and market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock regardless of our actual operating performance.
Future sales of shares of our common stock in the public market, or the perception that such sales may occur, may depress our stock price.
For the period ended December 31, 2013, the average daily trading volume of our common stock on The NASDAQ Global Select Market was approximately 1.9 million shares. If our existing stockholders or their distributees sell substantial amounts of our common stock in the public market, the market price of the common stock could decrease significantly. The perception in the public market that our existing stockholders might sell shares of common stock could also depress the trading price of our common stock. In addition, certain stockholders have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. If Liberty or some other stockholder sells substantial amounts of our common stock in the public market, or if there is a perception in the public market that Liberty might sell shares of our common stock, the market price of our common stock could decrease significantly. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.
Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change of control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders to replace or remove our current management.
Our certificate of incorporation and bylaws contain provisions that could delay or prevent a change of control of our company or changes in our Board of Directors that our stockholders might consider favorable. Some of these provisions:
| Authorize the issuance of preferred stock which can be created and issued by the Board of Directors without prior stockholder approval, with rights senior to those of our common stock; and |
| Prohibit our stockholders from filling board vacancies or calling special stockholder meetings. |
We are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our certificate of incorporation, bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our Board of Directors or initiate actions that are opposed by our then-current Board of Directors, including a merger, tender offer or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our Board of Directors could cause the market price of our common stock to decline.
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Item 1B. | Unresolved Staff Comments |
None.
Item 2. | Properties |
We currently lease approximately 119,000 square feet for our corporate headquarters in Newton, Massachusetts, pursuant to a lease with an expiration date of April 2015. In addition, in June 2013 we entered into an additional lease for an approximately 280,000 square foot rental building which will be built in Needham, Massachusetts by the lessor and will serve as our new corporate headquarters in conjunction with the expiration of our current lease. Refer to Note 12Commitments and Contingencies in the notes to our consolidated and combined financial statements for further information on our future corporate headquarters.
We also lease an aggregate of approximately 382,000 square feet at approximately 30 other locations across North America, Europe and Asia Pacific, primarily for our international management teams, sales offices, and subsidiary headquarters, pursuant to leases with expiration dates through December 2030.
We believe that our current facilities are adequate for our current operations and that additional leased space can be obtained on reasonable terms if needed. We do not legally own any real estate as of December 31, 2013.
Item 3. | Legal Proceedings |
In the ordinary course of business, we and our subsidiaries are parties to legal proceedings and claims involving alleged infringement of third-party intellectual property rights, defamation, and other claims. Rules of the SEC require the description of material pending legal proceedings, other than ordinary, routine litigation incident to the registrants business, and advise that proceedings ordinarily need not be described if they primarily involve damages claims for amounts (exclusive of interest and costs) not individually exceeding 10% of the current assets of the registrant and its subsidiaries on a consolidated basis. In the judgment of management, none of the pending litigation matters that TripAdvisor and our subsidiaries are defending involves or is likely to involve amounts of that magnitude. There may be claims or actions pending or threatened against us of which we are currently not aware and the ultimate disposition of which would have a material adverse effect on us.
Item 4. | Mine Safety Disclosures |
Not applicable.
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Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
Our common stock is quoted on the Nasdaq Global Select Market, or NASDAQ, under the ticker symbol TRIP. On February 6, 2014, the closing price of our common stock reported on NASDAQ was $77.14 per share.
Our Class B common stock is not listed and there is no established public trading market for that security. As of February 6, 2014, all of our Class B common stock was held by Liberty.
The following table sets forth, for the periods indicated, the high and low sale prices per share of our common stock as reported on NASDAQ during the period indicated.
High | Low | |||||||
Year ended December 31, 2013: | ||||||||
Fourth Quarter 2013: |
$ | 90.43 | $ | 68.11 | ||||
Third Quarter 2013: |
$ | 82.19 | $ | 59.54 | ||||
Second Quarter 2013: |
$ | 65.41 | $ | 48.18 | ||||
First Quarter 2013: |
$ | 53.73 | $ | 42.04 | ||||
Year ended December 31, 2012: | ||||||||
Fourth Quarter 2012: |
$ | 47.00 | $ | 28.63 | ||||
Third Quarter 2012: |
$ | 47.81 | $ | 31.71 | ||||
Second Quarter 2012: |
$ | 46.30 | $ | 33.23 | ||||
First Quarter 2012: |
$ | 36.86 | $ | 24.57 |
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Performance Comparison Graph
The following graph provides a comparison of the total stockholder return from December 21, 2011 to December 31, 2013 of an investment of $100 in cash on December 21, 2011 for TripAdvisor, Inc. common stock and an investment of $100 in cash on November 30, 2011 for (i) the Standard and Poors 500 Index (the S&P 500 Index), (ii) the NASDAQ Composite Index, , and (iii) the Research Data Group (RDG) Internet Composite Index. The RDG Internet Composite Index is an index of stocks representing the Internet industry, including Internet software and service companies and e-commerce companies. The stock price performance shown on the graph below is not necessarily indicative of future price performance. Data for the S&P 500 Index, the NASDAQ Composite Index, and the RDG Internet Composite Index assume reinvestment of dividends. We have never paid dividends on our common stock.
This performance comparison graph is not soliciting material, is not deemed filed with the Securities and Exchange Commission and is not deemed to be incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing of TripAdvisor, Inc. under the Securities Act of 1933, as amended (the Securities Act), or any filing under the Securities Exchange Act of 1934, as amended (the Exchange Act), except to the extent that we specifically request that the information be treated as soliciting material or specifically incorporate this information by reference into any such filing, and will not otherwise be deemed incorporated by reference into any other filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference.
Holders of Record
As of February 6, 2014, there were 129,432,796 outstanding shares of our common stock held by 3,150 stockholders of record, and 12,799,999 outstanding shares of our Class B common stock held by one stockholder of record: Liberty.
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Dividends
We have never declared or paid dividends and do not expect to pay any dividends for the foreseeable future. Our ability to pay dividends is limited by the terms of a credit agreement, dated as of December 20, 2011, that provides for a revolving credit facility and a term loan. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our Board of Directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our Board of Directors may deem relevant.
Unregistered Sales of Equity Securities
During the year ended December 31, 2013, we did not issue or sell any shares of our common stock or other equity securities pursuant to unregistered transactions in reliance upon an exemption from the registration requirements of the Securities Act.
Issuer Purchases of Equity Securities
In February 2013, we announced that our Board of Directors authorized the repurchase of $250 million of shares of our common stock under a share repurchase program. We intend to use available cash and future cash from operations to fund repurchases under the share repurchase program. The repurchase program has no expiration date but may be suspended or terminated by the Board of Directors at any time. Our Board of Directors will determine the price, timing, amount and method of such repurchases based on its evaluation of market conditions and other factors, and any shares repurchased will be in compliance with applicable legal requirements, at prices determined to be attractive and in the best interests of both the company and its stockholders.
During the three months ended December 31, 2013, we repurchased 37,000 shares of outstanding common stock under the share repurchase program at an average price of $78.35 per share. Below is a summary of our common stock repurchases during the fourth quarter of 2013, the average price paid as well as the U.S. dollar value of shares that may still be purchased as of December 31, 2013:
Period |
Total Number of Shares Purchased |
Average Price Paid per Share (1) |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
October 1 to October 31 |
37,000 | $ | 78.35 | 37,000 | $ | 104,779,230 | ||||||||||
November 1 to November 30 |
| | | 104,779,230 | ||||||||||||
December 1 to December 31 |
| | | 104,779,230 | ||||||||||||
|
|
|
|
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Total |
37,000 | 37,000 | ||||||||||||||
|
|
|
|
(1) | These amounts include fees and commissions associated with the share repurchase. |
Equity Compensation Plan Information
Our equity plan information required by this item is incorporated by reference to the information in Part III, Item 12. of this Annual Report on Form 10-K.
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Item 6. | Selected Financial Data |
We have derived the following selected financial data presented below from our consolidated and combined financial statements and related notes. The information set forth below is not necessarily indicative of future results and should be read in conjunction with the consolidated and combined financial statements and related notes appearing in Item 8 Financial Statements and Supplementary Data and Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K. Historical results are not necessarily indicative of the results to be expected in any future period. The financial statements and related financial information pertaining to the periods preceding December 21, 2011 have been presented on a combined basis and reflect the results of TripAdvisor that were ultimately transferred to us as part of the Spin-Off.
Year Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||
Consolidated and Combined Statements of Operations Data: |
||||||||||||||||||||
Revenue |
$ | 727,236 | $ | 559,215 | $ | 426,045 | $ | 313,525 | $ | 212,375 | ||||||||||
Revenue from Expedia |
217,425 | 203,751 | 211,018 | 171,110 | 139,714 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenue |
944,661 | 762,966 | 637,063 | 484,635 | 352,089 | |||||||||||||||
Operating income |
294,574 | 296,296 | 272,757 | 226,300 | 168,178 | |||||||||||||||
Net Income |
205,443 | 194,588 | 177,791 | 138,954 | 102,215 | |||||||||||||||
Net income attributable to TripAdvisor, Inc. |
205,443 | 194,069 | 177,677 | 138,776 | 102,427 | |||||||||||||||
Net income per share attributable to TripAdvisor, Inc. available to common shareholders: |
||||||||||||||||||||
Basic (1) |
$ | 1.44 | $ | 1.39 | $ | 1.33 | $ | 1.04 | $ | 0.77 | ||||||||||
Diluted (1) |
1.41 | 1.37 | 1.32 | 1.04 | 0.77 | |||||||||||||||
Shares used in computing net income per share: |
||||||||||||||||||||
Basic (1) |
142,854 | 139,462 | 133,461 | 133,461 | 133,461 | |||||||||||||||
Diluted (1) |
145,263 | 141,341 | 134,865 | 133,461 | 133,461 |
December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Consolidated Balance Sheet Data: |
||||||||||||||||||||
Cash and cash equivalents, short and long term marketable securities (2) |
$ | 670,706 | $ | 585,733 | $ | 183,532 | $ | 93,133 | $ | 31,364 | ||||||||||
Working capital (deficit) (2)(3) |
387,396 | 436,854 | 151,792 | 34,112 | (78,560 | ) | ||||||||||||||
Total assets (2) |
1,473,014 | 1,299,194 | 835,886 | 722,889 | 574,826 | |||||||||||||||
Long-term debt, less current portion (4) |
300,000 | 340,000 | 380,000 | | | |||||||||||||||
Other long-term obligations under build to suit lease |
7,877 | | | | | |||||||||||||||
Total stockholders equity and invested equity (5) |
864,480 | 726,968 | 293,537 | 539,632 | 389,914 |
Year Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Other Financial Data: |
||||||||||||||||||||
Adjusted EBITDA (6) |
$ | 378,753 | $ | 352,474 | $ | 322,918 | $ | 260,963 | $ | 197,219 |
(1) | See Note 2Significant Accounting Policies in the notes to the consolidated and combined financial statements in Item 8 below regarding our calculation of earnings per share numbers. |
(2) | Includes one-time exercise proceeds of $215 million related to stock warrant exercises for the year ended December 31, 2012. See Note 4Stock Based Awards and Other Equity Instruments in the notes to the consolidated and combined financial statements in Item 8 below for additional information on our equity based instruments. |
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(3) | Amount does not include available for sale long-term marketable securities of $188 million and $99 million, as of December 31, 2013 and 2012, respectively. |
(4) | See Note 8Debt in the notes to the consolidated and combined financial statements for information regarding our long-term debt. |
(5) | See our consolidated and combined statements of changes in stockholders equity and Note 14Stockholders Equity in the notes to the consolidated and combined financial statements in Item 8 below for additional information on changes to our stockholders equity and invested capital. |
(6) | To provide investors with additional information regarding our financial results, we have disclosed Adjusted EBITDA, a non-GAAP financial measure, within this Annual Report on Form 10-K. Adjusted EBITDA is the primary metric by which management evaluates the performance of our business and on which internal budgets are based. We define Adjusted EBITDA as net income (loss) plus: (1) provision for income taxes; (2) other (income) expense, net; (3) depreciation of property and equipment, including internal use software and website development; (4) amortization of intangible assets; (5) stock-based compensation; and (6) non-recurring expenses. Such amounts are detailed below. See a discussion of Adjusted EBITDA in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations within this Annual Report on Form 10-K. |
We have provided a reconciliation below of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure.
Year Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Adjusted EBITDA |
$ | 378,753 | $ | 352,474 | $ | 322,918 | $ | 260,963 | $ | 197,219 | ||||||||||
Depreciation (1) |
(29,495 | ) | (19,966 | ) | (18,362 | ) | (12,871 | ) | (9,330 | ) | ||||||||||
Amortization of intangible assets |
(5,731 | ) | (6,110 | ) | (7,523 | ) | (14,609 | ) | (13,806 | ) | ||||||||||
Stock-based compensation |
(48,953 | ) | (30,102 | ) | (17,344 | ) | (7,183 | ) | (5,905 | ) | ||||||||||
Spin-Off costs |
| | (6,932 | ) | | | ||||||||||||||
Other expense, net |
(9,872 | ) | (14,321 | ) | (863 | ) | (1,885 | ) | (1,638 | ) | ||||||||||
Provision for income taxes |
(79,259 | ) | (87,387 | ) | (94,103 | ) | (85,461 | ) | (64,325 | ) | ||||||||||
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|
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Net income |
$ | 205,443 | $ | 194,588 | $ | 177,791 | $ | 138,954 | $ | 102,215 | ||||||||||
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(1) | Includes amortization of internal use software and website development costs. |
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Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Overview
TripAdvisor is the worlds largest online travel company. Our mission is to help people around the world plan and have the perfect trip by giving them access to the reviews and opinions of the millions of travelers who make up our global online community. TripAdvisor aggregates reviews and opinions about destinations, accommodations (including hotels, B&Bs, specialty lodging and vacation rentals), restaurants and activities throughout the world. Our platform also enables consumers to book hotels, vacation rentals, airline tickets, vacation packages, destination services and even cruises.
Our branded websites include tripadvisor.com in the United States and localized versions of the website in 33 other countries, including China under the brand daodao.com. Our TripAdvisor-branded websites globally reached more than 260 million monthly unique visitors during the year ended December 31, 2013, according to Google Analytics. We feature over 125 million reviews and opinions on more than 775,000 hotels and accommodations and approximately 550,000 vacation rentalsas well as more than 2 million restaurants and 400,000 attractions in 139,000 destinations throughout the world. Beyond travel-related content, our websites also include links to the websites of our customers, including travel advertisers, allowing travelers to directly book their travel arrangements. In addition to the flagship TripAdvisor brand, we now manage and operate 20 other travel media brands, connected by the common goal of providing comprehensive travel planning resources across the travel sector.
Executive Summary
At present, our financial results are principally dependent on our ability to grow click-based advertising revenue. We continue to invest in areas of potential click-based revenue growth, including international and mobile initiatives, while also investing in our Display-based advertising, Business Listings and Vacation Rentals businesses. We aim to leverage our position as the largest online travel company to become an increasingly important partner for advertisersincluding hoteliers, online travel agencies and other travel-related service providersby providing our customers with access to a large audience of highly-qualified, highly-engaged users. The key drivers of our click-based and display-based advertising revenue are described below, as well as a summary of our key growth areas and the current trends impacting our business.
Key Drivers of Click-Based Advertising Revenue
For the years ended December 31, 2013, 2012 and 2011, 74%, 77% and 79%, respectively, of our total revenue came from our core CPC-based lead generation product. The key drivers of our click-based advertising revenue include the growth in monthly unique hotel shoppers and revenue per hotel shopper.
| Hotel shoppers: Total traffic growth, or growth in monthly visits from unique visitors, is reflective of our overall brand growth. We track and analyze sub-segments of traffic and their correlation to revenue generation and utilize hotel shoppers as an indicator of revenue growth. We use the term hotel shoppers to refer to users who view a listing of hotels in a city or visitors who view a specific hotel page. Hotel shoppers tend to be seasonal and also tend to vary based on general economic conditions. Our number of hotel shoppers increased 36% for the year ended December 31, 2013 over 2012 and increased 32% for the year ended December 31, 2012 over 2011, according to our log files. |
| Revenue per hotel shopper: Revenue per hotel shopper is a metric we use to analyze how effectively we are able to monetize hotel shoppers based on a combination of user conversion and pricing. User conversion is a measure of how many hotel shoppers ultimately click on a CPC link that generates revenue for us. User conversion on our site is primarily driven by three factors: merchandising, commerce coverage and choice. We define merchandising as the number and location of ads that are available on a page; we define commerce coverage as whether we have a client who can take an online booking for a particular property; and we define choice as the number of clients available for any given |
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property, allowing the user to shop for the best price. Pricing is the effective CPC that online travel agencies and hoteliers are willing to pay us for a hotel shopper lead. Revenue per hotel shopper decreased 13% for the year ended December 31, 2013 in comparison to 2012, and decreased 8% for the year ended December 31, 2012 in comparison to 2011, according to our log files. |
In summary, our CPC revenue depends on the number of hotel shoppers that are interested in a property, whether there is a commerce link available for that hotel shopper to click on for that property, whether there are several commerce choices available for that property so the hotel shopper has the benefit of pricing and availability from multiple sources and what our customers are willing to pay us for the lead.
Key Drivers of Display-Based Advertising Revenue
For the years ended December 31, 2013, 2012 and 2011, 13%, 12% and 13%, respectively, of our total revenue came from our display-based advertising product. The key drivers of our display-based advertising revenue include the growth in number of impressions, or the number of times an ad is displayed on our site, and the cost per thousand impressions, or CPM. Our number of impressions sold increased 34% for the year ended December 31, 2013 over 2012 and increased 6% for the year ended December 31, 2012 over 2011, while pricing decreased 5% for the year ended December 31, 2013 over 2012 and increased 1% for the years ended December 31, 2012 over 2011, according to our customer logs.
Key Growth Areas
We continue to invest in areas of potential growth, including our social, mobile and global initiatives as well as our Business Listings and Vacation Rentals products.
Mobile. Mobile is an investment area that is geared towards creating a more complete user experience by reinforcing the TripAdvisor brand when users are in-market. In the year ended December 31, 2013, we saw strong mobile user uptake, as aggregate downloads of our TripAdvisor, City Guides, SeatGuru, Jetsetter and GateGuru mobile apps reached 82 million downloads and average monthly unique visitors via smartphone and tablet devices grew over 170% year-over-year from 32 million to 87 million, according to company logs. We believe that travelers will increasingly use mobile devices, including smartphones and tablets, to conduct travel research and planning.
Social. Our Wisdom of Friends initiative is a core component of our strategic growth plan. We believe that having a strong social presence improves engagement on our sites and improves the sites stickiness amongst the users. As a result, we continue to deepen our integration with Facebook. As of December 31, 2013, and according to AppData, an independent application tracking traffic service, TripAdvisor has averaged over 36 million monthly Facebook users via its TripAdvisor Facebook application. We offer these Facebook users a more personalized and social travel planning experience that enables travelers to engage with their own Facebook friends reviews and opinions when planning their perfect trip on TripAdvisor.
Business Listings. Created in early 2010, our Business Listings product enables hotel and accommodation owners to list pertinent property information on TripAdvisor, bringing them closer to potential customers and thereby increasing direct bookings. In the year ended December 31, 2013, we grew our Business Listings customer base over 38% to 69,000 subscribers, representing approximately 9% of our current hotel and accommodation listings on TripAdvisor branded sites. We continue to expand our sales force and improve features to grow our subscriber base.
Vacation Rentals. As of December 31, 2013, we had amassed an inventory of approximately 550,000 properties, up more than 80% during the year, across our TripAdvisor Vacation Rentals, U.S.-based FlipKey, and European-based Holiday Lettings and Niumba. We offer individual property owners and property managers the ability to list using a subscription-based fee structure or a free-to-list, commission-based option and we believe our highly-engaged and motivated user community creates a competitive advantage for us in this market.
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Current Trends Affecting Our Business
Increasing Competition. The travel review industry and, more generally, the business of collecting and aggregating travel-related resources and information, continue to be increasingly competitive. In recent years, an increasing number of companies, such as search companies Google, Inc. and Baidu.com, Inc. and several large online travel agencies, have begun to collect and aggregate travel information and resources. We plan to continue to invest in order to remain the leading source of travel reviews as well as continuing to enhance our content and user experience. Refer to our discussion above in Competition in Item 1 Business section for additional information on our competition.
Increasing Use of Internet and Social Media to Access Travel Information. Commerce, information and advertising continue to migrate to the Internet and away from traditional media outlets. We believe that this trend will continue to create strategic growth opportunities, allowing us to attract new consumers and develop unique and effective advertising solutions. Consumers are increasingly using online social media channels, such as Facebook and Twitter, as a means to communicate and exchange information, including travel information and opinions. We have made significant efforts related to social networking in order to leverage the expanding use of this channel and enhance traffic diversification and user engagement. We are also continually adapting our user experience in response to a changing Internet environment and usage trends. For example, in 2012, we invested in building and introducing to users hotel metasearch functionality for our smartphone platforms and in 2013, we completed the process of implementing hotel metasearch functionality on our desktop and tablet platforms. Refer to our metasearch discussion above under Improving the Hotel Shopper Experience in the Our Strategy section in Item 1 Business for additional information on our hotel metasearch transition.
Increasing Mobile Usage. Users are increasingly using smartphone and tablet computing devices to access the Internet. To address these growing user demands, we continue to extend our platform to develop smartphone and tablet applications to deliver travel information and resources. Although the substantial majority of our smartphone users also access and engage with our websites on personal computers and tablets where we display advertising, our users could decide to access our products primarily through smartphone devices. We have just begun to display graphic advertising on smartphones, however, our smartphone monetization strategies are still developing, as smartphone monetization was less than 20% of desktop monetization of hotel shoppers during the year ended December 31, 2013 while tablets monetize more closely to desktops. Mobile growth and development remains a key strategy and we will continue to invest and innovate in this growing platform to help us maintain and grow our user base, engagement and monetization over the long term.
Click-Based Advertising Revenue. In recent years, the majority of our revenue growth resulted from higher click-based advertising revenue due to increased traffic on our websites and an increase in the volume of clicks on our advertisers placements. Although click-based advertising revenue growth has generally been driven by traffic volume, we remain focused on the various factors that could impact revenue growth, including, but not limited to, the growth in hotel shoppers, CPC pricing fluctuations, the overall economy, the ability of advertisers to monetize our traffic, the quality and mix of traffic to our websites, and the quality and mix of traffic from our advertising placements to advertisers, as well as advertisers evolving approach to transaction attribution models and return on investment targets. We monitor and regularly respond to changes in these factors in order to strategically improve our user experience, customer satisfaction and monetization in this dynamic environment. For example, in order to improve user experience, we introduced metasearch functionality to our hotel shoppers as discussed above under Improving the Hotel Shopper Experience in the Our Strategy section in Item 1 Business.
Spin-Off
During 2011, Expedia, Inc., or Expedia, announced its plan to separate into two independent public companies in order to better achieve certain strategic objectives of its various businesses. We refer to this transaction as the Spin-Off. On December 20, 2011, following the close of trading on the NASDAQ Global Select Market (NASDAQ), the Spin-Off was completed, and TripAdvisor began trading as an independent
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public company on December 21, 2011. Expedia effected the Spin-Off by means of a reclassification of its capital stock that resulted in the holders of Expedia capital stock immediately prior to the time of effectiveness of the reclassification having the right to receive a proportionate amount of TripAdvisor capital stock. In connection with the Spin-Off, Expedia contributed or transferred all of the subsidiaries and assets relating to Expedias TripAdvisor Media Group to TripAdvisor and TripAdvisor assumed all of the liabilities relating to Expedias TripAdvisor Media Group.
For purposes of governing certain of the ongoing relationships between us and Expedia at and after the Spin-Off, and to provide for an orderly transition, we and Expedia have entered into various agreements, including, among others, the Separation Agreement, the Tax Sharing Agreement, the Employee Matters Agreement and Transition Services Agreement, and commercial agreements. The full texts of the Separation Agreement, the Tax Sharing Agreement, the Employee Matters Agreement and the Transition Services Agreement are incorporated by reference in this Annual Report on Form 10-K as Exhibits 2.1, 10.2, 10.3 and 10.4. TripAdvisor has satisfied its obligations under the Separation Agreement, the Employee Matters Agreement and the Transition Services Agreement. TripAdvisor continues to be subject to certain post-spin obligations under the Tax Sharing Agreement.
Segment
We have one operating and reportable segment. The segment is determined based on how our chief operating decision maker manages our business, makes operating decisions, evaluates operating performance and allocates resources. The chief operating decision maker for the company is our Chief Executive Officer.
42
Results of Operations
Selected Financial Data
(in thousands, except per share data)
Year ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 vs. 2012 | 2012 vs. 2011 | ||||||||||||||||
Revenue |
$ | 727,236 | $ | 559,215 | $ | 426,045 | 30 | % | 31 | % | ||||||||||
Revenue from Expedia |
217,425 | 203,751 | 211,018 | 7 | % | (3 | )% | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total revenue |
944,661 | 762,966 | 637,063 | 24 | % | 20 | % | |||||||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of revenue (exclusive of amortization) (1) |
17,714 | 12,074 | 10,873 | 47 | % | 11 | % | |||||||||||||
Selling and marketing (2) |
368,353 | 266,239 | 209,176 | 38 | % | 27 | % | |||||||||||||
Technology and content (2) |
130,673 | 86,640 | 57,448 | 51 | % | 51 | % | |||||||||||||
General and administrative (2) |
98,121 | 75,641 | 44,770 | 30 | % | 69 | % | |||||||||||||
Depreciation |
29,495 | 19,966 | 18,362 | 48 | % | 9 | % | |||||||||||||
Amortization of intangible assets |
5,731 | 6,110 | 7,523 | (6 | )% | (19 | )% | |||||||||||||
Shared services fee with Expedia |
| | 9,222 | | % | (100 | )% | |||||||||||||
Spin-off costs |
| | 6,932 | | % | (100 | )% | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total costs and expenses |
650,087 | 466,670 | 364,306 | 39 | % | 28 | % | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Operating income |
294,574 | 296,296 | 272,757 | (1 | )% | 9 | % | |||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
1,738 | 510 | 808 | 241 | % | (37 | )% | |||||||||||||
Interest expense |
(10,074 | ) | (11,381 | ) | (417 | ) | (11 | )% | 2,629 | % | ||||||||||
Other, net |
(1,536 | ) | (3,450 | ) | (1,254 | ) | (55 | )% | 175 | % | ||||||||||
|
|
|
|
|
|
|||||||||||||||
Total other expense, net |
(9,872 | ) | (14,321 | ) | (863 | ) | (31 | )% | 1,559 | % | ||||||||||
|
|
|
|
|
|
|||||||||||||||
Income before income taxes |
284,702 | 281,975 | 271,894 | 1 | % | 4 | % | |||||||||||||
Provision for income taxes |
(79,259 | ) | (87,387 | ) | (94,103 | ) | (9 | )% | (7 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||||||
Net income |
205,443 | 194,588 | 177,791 | 6 | % | 9 | % | |||||||||||||
Net (income) loss attributable to noncontrolling interest |
| (519 | ) | (114 | ) | (100 | )% | 355 | % | |||||||||||
|
|
|
|
|
|
|||||||||||||||
Net income attributable to TripAdvisor, Inc. |
$ | 205,443 | $ | 194,069 | $ | 177,677 | 6 | % | 9 | % | ||||||||||
|
|
|
|
|
|
|||||||||||||||
Earnings per share attributable to TripAdvisor, Inc : |
||||||||||||||||||||
Basic |
$ | 1.44 | $ | 1.39 | $ | 1.33 | 4 | % | 5 | % | ||||||||||
Diluted |
$ | 1.41 | $ | 1.37 | $ | 1.32 | 3 | % | 4 | % | ||||||||||
Weighted average common shares outstanding: |
||||||||||||||||||||
Basic |
142,854 | 139,462 | 133,461 | 2 | % | 4 | % | |||||||||||||
Diluted |
145,263 | 141,341 | 134,865 | 3 | % | 5 | % | |||||||||||||
Other financial data: |
||||||||||||||||||||
Adjusted EBITDA (3) |
$ | 378,753 | $ | 352,474 | $ | 322,918 | 7 | % | 9 | % | ||||||||||
|
||||||||||||||||||||
(1) Excludes amortization as follows: |
||||||||||||||||||||
Amortization of acquired technology included in amortization of intangibles |
$ | 949 | $ | 708 | $ | 578 | ||||||||||||||
Amortization of website development costs included in depreciation |
19,602 | 12,816 | 12,438 | |||||||||||||||||
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|
|
|
|
|||||||||||||||
$ | 20,551 | $ | 13,524 | $ | 13,016 | |||||||||||||||
(2) Includes stock-based compensation as follows: |
||||||||||||||||||||
Selling and marketing |
$ | 10,643 | $ | 4,622 | $ | 3,216 | ||||||||||||||
Technology and content |
21,053 | 11,400 | 3,931 | |||||||||||||||||
General and administrative |
17,257 | 14,080 | 10,197 |
(3) | See Adjusted EBITDA discussion below for more information and for a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP. |
43
Adjusted EBITDA
To provide investors with additional information regarding our financial results, we have disclosed Adjusted EBITDA in this Annual Report on Form 10-K, a non-GAAP financial measure. We have provided reconciliations below of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure. A non-GAAP financial measure refers to a numerical measure of a companys historical or future financial performance, financial position, or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP in such companys financial statements.
We define Adjusted EBITDA as net income (loss) plus: (1) provision for income taxes; (2) other (income) expense, net; (3) depreciation of property and equipment, including internal use software and website development; (4) amortization of intangible assets; (5) stock-based compensation; and (6) non-recurring expenses. Adjusted EBITDA is the primary metric by which management evaluates the performance of its business and on which internal budgets are based. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis. Adjusted EBITDA eliminates items that are either not part of our core operations, such as non-recurring expenses, or those costs that do not require a cash outlay, such as stock-based compensation. Adjusted EBITDA also excludes depreciation and amortization expense, which is based on our estimates of the useful life of tangible and intangible assets. These estimates could vary from actual performance of the asset, are based on historical costs and other factors and may not be indicative of current or future capital expenditures. We believe that by excluding certain items, such as stock-based compensation and non-recurring expenses, Adjusted EBITDA corresponds more closely to the cash that operating income generated from our business and allows investors to gain an understanding of the factors and trends affecting the ongoing cash earnings capabilities of our business, from which capital investments are made and debt is serviced.
Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results reported in accordance with GAAP. Some of these limitations are:
| Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; |
| Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| Adjusted EBITDA does not consider the potentially dilutive impact of stock-based compensation; |
| Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; |
| Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and |
| Other companies, including companies in our own industry, may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income and our other GAAP results.
44
The following table is a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, for the periods presented:
Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in thousands) |
||||||||||||
Adjusted EBITDA |
$ | 378,753 | $ | 352,474 | $ | 322,918 | ||||||
Depreciation (1) |
(29,495 | ) | (19,966 | ) | (18,362 | ) | ||||||
Amortization of intangible assets |
(5,731 | ) | (6,110 | ) | (7,523 | ) | ||||||
Stock-based compensation |
(48,953 | ) | (30,102 | ) | (17,344 | ) | ||||||
Spin-off costs |
| | (6,932 | ) | ||||||||
Other expense, net |
(9,872 | ) | (14,321 | ) | (863 | ) | ||||||
Provision for income taxes |
(79,259 | ) | (87,387 | ) | (94,103 | ) | ||||||
|
|
|
|
|
|
|||||||
Net income |
205,443 | 194,588 | 177,791 | |||||||||
|
|
|
|
|
|
(1) | Includes amortization of internal use software and website development costs. |
Reclassifications
Certain reclassifications have been made to conform the prior periods data to the current format. These reclassifications had no net effect on our consolidated and combined financial statements and were not material.
Revenue
We derive substantially all of our revenue through the sale of advertising, primarily through click-based advertising and, to a lesser extent, display-based advertising. In addition, we earn revenue through a combination of subscription-based offerings related to our Business Listings and Vacation Rentals products, transaction revenue from selling room nights on our transactional sites, and other revenue including content licensing.
Year ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 vs. 2012 | 2012 vs. 2011 | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Click-based advertising |
$ | 696 | $ | 588 | $ | 500 | 18 | % | 18 | % | ||||||||||
Display-based advertising |
119 | 94 | 86 | 26 | % | 10 | % | |||||||||||||
Subscription, transaction and other |
130 | 81 | 51 | 60 | % | 58 | % | |||||||||||||
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|
|
|
|
|
|||||||||||||||
Total revenue |
$ | 945 | $ | 763 | $ | 637 | 24 | % | 20 | % | ||||||||||
|
|
|
|
|
|
2013 vs. 2012
Revenue increased $182 million during the year ended December 31, 2013 when compared to the same period in 2012, primarily due to an increase in click-based advertising revenue of $108 million. The primary driver of the increase in click-based advertising revenue was an increase in hotel shoppers of 36% for the year ended December 31, 2013, partially offset by lower revenue per hotel shopper of 13% for the year ended December 31, 2013, primarily due to a combination of lower user conversion related to our transition to hotel metasearch, growth in hotel shoppers on smartphones, which have a lower monetization rate than desktops and tablets, and growth in emerging international markets that are currently monetizing at lower levels than our mature markets. Display-based advertising increased by $25 million during the year ended December 31, 2013, primarily as a result of a 34% increase in the number of impressions sold due to increased sales productivity coupled with our new Delayed Ad Call product, and worldwide growth particularly in emerging markets when compared to the same period in 2012, partially offset by a decrease in pricing by 5% for the year ended December 31, 2013. Subscription, transaction and other revenue increased by $49 million during the year ended December 31, 2013, primarily due to growth in our Business Listings and Vacation Rentals products.
45
2012 vs. 2011
Revenue increased $126 million during the year ended December 31, 2012 when compared to the same period in 2011, primarily due to an increase in click-based advertising revenue of $88 million. The primary driver of the increase in click-based advertising revenue was an increase in hotel shoppers during the year ended December 31, 2012, when compared to the same period for 2011, of 32%, partially offset by lower revenue per hotel shopper of 8% for the year ended December 31, 2012, primarily due to lower clicks per hotel shopper due to our site redesign in September 2011. Display-based advertising increased by $8 million during the year ended December 31, 2012, primarily as a result of a 6% increase in the number of impressions sold when compared to the same period in 2011, and an increase in pricing by 1% for the year ended December 31, 2012. Subscription, transaction and other revenue increased by $30 million during the year ended December 31, 2012, primarily due to growth in our Business Listings and Vacation Rentals products.
The following table presents our revenue by geographic region, which reflects how we measure our business internally. Revenue by geography is based on the location of our websites:
Year ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 vs. 2012 | 2012 vs. 2011 | ||||||||||||||||
($ in millions) | ||||||||||||||||||||
North America (1) |
$ | 494 | $ | 409 | $ | 360 | 21 | % | 13 | % | ||||||||||
EMEA (2) |
291 | 240 | 218 | 21 | % | 10 | % | |||||||||||||
APAC (3) |
122 | 82 | 46 | 49 | % | 80 | % | |||||||||||||
LATAM (4) |
38 | 32 | 13 | 20 | % | 137 | % | |||||||||||||
|
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|
|
|
|||||||||||||||
Total revenue |
$ | 945 | $ | 763 | $ | 637 | 24 | % | 20 | % | ||||||||||
|
|
|
|
|
|
(1) | United States and Canada* |
(2) | Europe, Middle East and Africa |
(3) | Asia-Pacific |
(4) | Latin America |
* | Included in international revenue for discussion purposes. |
International revenue increased $105 million and $88 million during the years ended December 31, 2013 and 2012, respectively, compared to the same periods in 2012 and 2011. International revenue represented 51%, 49%, and 45% of total revenue during the years ended December 31, 2013, 2012, and 2011, respectively. The increase in international revenue, in absolute dollars and as a percentage of total revenue, is primarily due to additional investment in international expansion and growth in international hotel shoppers.
In addition to the above product revenue discussion, Revenue from Expedia, which consists primarily of click-based advertising, is as follows:
Year ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 vs. 2012 | 2012 vs. 2011 | ||||||||||||||||
($ in millions) | ||||||||||||||||||||
Revenue from Expedia |
$ | 217 | $ | 204 | $ | 211 | 7 | % | (3 | )% | ||||||||||
% of revenue |
23.0 | % | 26.7 | % | 33.1 | % |
2013 vs. 2012
Revenue from Expedia increased $13 million during the year ended December 31, 2013, respectively, when compared to the same period in 2012, primarily due to lower click volume sent to Expedia, primarily related to our transition to hotel metasearch which was more than offset by higher CPC pricing paid by Expedia during this time period. For information on our relationship with Expedia refer to Note 15Related Party Transactions in the notes to our consolidated and combined financial statements.
46
2012 vs. 2011
Revenue from Expedia decreased $7 million during the year ended December 31, 2012 when compared to the same period in 2011, primarily due to lower CPC pricing paid by Expedia, partially offset by higher click volume sent to Expedia in 2012.
Cost of Revenue
Cost of revenue consists of expenses that are closely correlated or directly related to revenue generation, including ad serving fees, flight search fees, credit card fees and data center costs.
Year ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 vs. 2012 | 2012 vs. 2011 | ||||||||||||||||
($ in millions) | ||||||||||||||||||||
Cost of revenue |
$ | 18 | $ | 12 | $ | 11 | 47 | % | 11 | % | ||||||||||
% of revenue |
1.9 | % | 1.6 | % | 1.7 | % |
2013 vs. 2012
Cost of revenue increased $6 million during the year ended December 31, 2013 when compared to the same period in 2012, primarily due to increased data center costs, driven by higher site traffic and merchant credit card fees.
2012 vs. 2011
Cost of revenue increased $1 million during the year ended December 31, 2012 when compared to the same period in 2011, primarily due to increased merchant credit card fees.
Selling and Marketing
Sales and marketing expenses primarily consist of direct costs, including search engine marketing, or SEM, other traffic acquisition costs, syndication costs and affiliate program commissions, brand advertising and public relations. In addition, our indirect sales and marketing expense consists of personnel and overhead expenses, including salaries, commissions, benefits, stock-based compensation expense and bonuses for sales, sales support, customer support and marketing employees.
Year ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 vs. 2012 | 2012 vs. 2011 | ||||||||||||||||
($ in millions) | ||||||||||||||||||||
Direct costs |
$ | 243 | $ | 177 | $ | 137 | 38 | % | 29 | % | ||||||||||
Personnel and overhead |
125 | 89 | 72 | 40 | % | 25 | % | |||||||||||||
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|
|
|
|
|
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Total selling and marketing |
$ | 368 | $ | 266 | $ | 209 | 38 | % | 27 | % | ||||||||||
|
|
|
|
|
|
|||||||||||||||
% of revenue |
39.0 | % | 34.9 | % | 32.8 | % |
2013 vs. 2012
Direct selling and marketing costs increased $66 million during the year ended December 31, 2013 when compared to the same period in 2012, primarily due to increased SEM costs, other traffic acquisition costs and brand advertising costs, including offline advertising, partially offset by a decrease in spending in social media costs. Personnel and overhead costs increased $36 million during the year ended December 31, 2013 when compared to the same period in 2012, primarily due to an increase in headcount to support business growth, including international expansion and employees joining us through recent business acquisitions, and also increased stock-based compensation costs.
47
2012 vs. 2011
Direct selling and marketing costs increased $40 million during the year ended December 31, 2012 when compared to the same period in 2011, primarily due to increased search engine marketing costs, brand advertising costs and investments in social media costs. We increased our spending on social media in the year ended December 31, 2012 compared to the same period in 2011, in order to increase social engagement on our websites. Personnel and overhead costs increased $17 million during the year ended December 31, 2012 when compared to the same period in 2011, primarily due to an increase in headcount to support business growth, including international expansion.
Technology and Content
Technology and content expenses consist of personnel and overhead expenses, including salaries and benefits, stock-based compensation expense and bonuses for salaried employees and contractors engaged in the design, development, testing, content support, and maintenance of our websites. Other costs include licensing and maintenance expense.
Year ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 vs. 2012 | 2012 vs. 2011 | ||||||||||||||||
($ in millions) | ||||||||||||||||||||
Personnel and overhead |
$ | 121 | $ | 80 | $ | 51 | 51 | % | 56 | % | ||||||||||
Other |
10 | 7 | 6 | 45 | % | 7 | % | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total technology and content |
$ | 131 | $ | 87 | $ | 57 | 51 | % | 51 | % | ||||||||||
|
|
|
|
|
|
|||||||||||||||
% of revenue |
13.8 | % | 11.4 | % | 9.0 | % | ||||||||||||||
|
|
|
|
|
|
2013 vs. 2012
Technology and content costs increased $44 million during the year ended December 31, 2013 when compared to the same period in 2012, primarily due to increased personnel costs from increased headcount to support business growth, including international expansion, enhanced site features, extending our products onto smartphone and tablet platforms, and development of our hotel metasearch product, as well as an increase in stock based compensation and additional personnel costs related to employees joining us through recent business acquisitions.
2012 vs. 2011
Technology and content costs increased $30 million during the year ended December 31, 2012 when compared to the same period in 2011, primarily due to increased personnel costs from increased headcount to support business growth, including international expansion, enhanced site features, extending our products onto smartphone and tablet platforms, and development of our hotel metasearch product, as well as an increase in stock based compensation.
48
General and Administrative
General and administrative expense consists primarily of personnel and related overhead costs, including executive leadership, finance, legal and human resource functions and stock-based compensation as well as professional service fees and other fees including audit, legal, tax and accounting, and other costs including bad debt expense and our charitable foundation costs.
Year ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 vs. 2012 | 2012 vs. 2011 | ||||||||||||||||
($ in millions) | ||||||||||||||||||||
Personnel and overhead |
$ | 66 | $ | 51 | $ | 37 | 30 | % | 39 | % | ||||||||||
Professional service fees and other |
32 | 25 | 8 | 28 | % | 203 | % | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total general and administrative |
$ | 98 | $ | 76 | $ | 45 | 30 | % | 69 | % | ||||||||||
|
|
|
|
|
|
|||||||||||||||
% of revenue |
10.4 | % | 9.9 | % | 7.0 | % |
2013 vs. 2012
General and administrative costs increased $22 million during the year ended December 31, 2013, when compared to the same period in 2012, primarily due to increased personnel costs related to an increase in stock-based compensation, as well as increased headcount to support business growth and additional professional service fees in order to support our operations and an increase in our bad debt provision.
2012 vs. 2011
General and administrative costs increased $31 million during the year ended December 31, 2012, when compared to the same period in 2011, due to increased personnel and overhead costs related to an increase in stock based compensation, as well as increased headcount to support business growth, and a full year of costs related to additional headcount and professional service fees to support our operations as a standalone public company in 2012. We also incurred increased professional service fees primarily related to legal and tax initiatives. In addition, in connection with the Spin-Off, we assumed Expedias obligation to fund a charitable foundation (see Note 12Commitments and Contingencies in the notes to the consolidated and combined financial statements). Our expense related to the funding of this charitable foundation was $7 million for the year ended December 31, 2012.
Shared Services Fee with Expedia
Prior to the Spin-Off, our shared services fee was comprised of allocations from Expedia for accounting, legal, tax, corporate development, treasury, financial reporting, real estate management and included an allocation of employee compensation within these functions. These allocations were determined based on what we and Expedia considered to be reasonable reflections of the utilization of services provided or the benefit received by us.
Year ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 vs. 2012 | 2012 vs. 2011 | ||||||||||||||||
($ in millions) | ||||||||||||||||||||
Shared services fee with Expedia |
$ | | $ | | $ | 9 | 0 | % | (100 | )% | ||||||||||
% of revenue |
0 | % | 0 | % | 1.4 | % |
Shared services fee costs incurred for the use of Expedia shared services ceased in connection with the Spin-Off. Refer to Note 15Related Party Transactions in the notes to our consolidated and combined financial statements for further information on our relationship with Expedia.
49
Depreciation
Year ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 vs. 2012 | 2012 vs. 2011 | ||||||||||||||||
($ in millions) | ||||||||||||||||||||
Depreciation |
$ | 29 | $ | 20 | $ | 18 | 48 | % | 9 | % | ||||||||||
% of revenue |
3.1 | % | 2.6 | % | 2.9 | % |
2013 vs. 2012
Depreciation expense increased $9 million during the year ended December 31, 2013 when compared to the same period in 2012 primarily due to increased amortization related to capitalized software and website development costs.
2012 vs. 2011
Depreciation expense increased $2 million during the year ended December 31, 2012 when compared to the same period in 2011 primarily due to increased amortization related to capitalized software and website development costs and additional depreciation of $1 million related to purchased software licenses and leasehold improvements.
Amortization of Intangible Assets
Year ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 vs. 2012 | 2012 vs. 2011 | ||||||||||||||||
($ in millions) | ||||||||||||||||||||
Amortization of intangible assets |
$ | 6 | $ | 6 | $ | 8 | (6 | )% | (19 | )% | ||||||||||
% of revenue |
0.6 | % | 0.8 | % | 1.2 | % |
2013 vs. 2012
Amortization of intangible assets did not materially change during the year ended December 31, 2013 when compared to the same period in 2012. Amortization related to acquired definite lived intangibles from business acquisitions during 2013 was more than offset by the completion of amortization related to certain technology intangible assets from prior years.
2012 vs. 2011
Amortization of intangible assets decreased $2 million during the year ended December 31, 2012 when compared to the same period in 2011, primarily due to the completion of amortization related to certain technology intangible assets.
Interest Income
Interest income primarily consists of interest earned and amortization of discounts and premiums on our marketable securities.
Year ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 vs. 2012 | 2012 vs. 2011 | ||||||||||||||||
($ in millions) | ||||||||||||||||||||
Interest income |
$ | 2 | $ | 1 | $ | 1 | 241 | % | (37 | )% | ||||||||||
% of revenue |
0.2 | % | 0.1 | % | 0.1 | % |
50
2013 vs. 2012
Interest income increased $1 million during the year ended December 31, 2013 when compared to the same period in 2012. The increase in interest income is primarily due to the fact that we began investing in marketable securities during the fourth quarter of 2012. Refer to Note 4Financial Instruments for additional information on our current portfolio as of December 31, 2013.
2012 vs. 2011
Interest income did not materially change during the year ended December 31, 2012 when compared to the same period in 2011.
Interest Expense
Interest expense primarily consists of interest incurred, commitment fees and debt issuance cost amortization related to our Credit Agreement and Chinese Credit Facilities.
Year ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 vs. 2012 | 2012 vs. 2011 | ||||||||||||||||
($ in millions) | ||||||||||||||||||||
Interest expense |
$ | 10 | $ | 11 | $ | | (11 | )% | 2,629 | % | ||||||||||
% of revenue |
1.1 | % | 1.5 | % | 0.1 | % |
2013 vs. 2012
The decrease in interest expense is primarily due to the lower outstanding borrowings and effective interest rates during the year ended December 31, 2013 over the same period during 2012 related to our Term Loan. Refer to Note 8Debt for additional information on our outstanding borrowing facilities.
2012 vs. 2011
The increase in interest expense is related to interest incurred as a result of us entering into our Credit Agreement for the year ending December 31, 2012 over the same period during 2011.
Other Expense, Net
Year ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 vs 2012 | 2012 vs 2011 | ||||||||||||||||
($ in millions) | ||||||||||||||||||||
Other Expense, Net |
$ | 2 | $ | 3 | $ | 1 | (55 | )% | 175 | % |
Other, net is primarily comprised of net foreign exchange losses and disposal of fixed assets for the periods presented.
Provision for Income Taxes
Year ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 vs. 2012 | 2012 vs. 2011 | ||||||||||||||||
($ in millions) | ||||||||||||||||||||
Provision for income taxes |
$ | 79 | $ | 87 | $ | 94 | (9 | )% | (7 | )% | ||||||||||
Effective tax rate |
27.8 | % | 31.0 | % | 34.6 | % |
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2013 vs. 2012
Our effective tax rates for the years ended December 31, 2013 and 2012 were 27.8% and 31.0%, respectively. Our effective tax rate is less than the federal statutory rate primarily due to earnings in jurisdictions outside the United States, where our effective tax rate is lower. This is partly driven by the current statutory tax rate of 23% in the United Kingdom and our tax incentive on qualifying income in Singapore granted by the Singapore Economic Development Board in 2011. Our effective tax rate is partially offset by state income taxes, non-deductible stock compensation and accruals on uncertain tax positions.
The decrease in the effective tax rate for 2013 compared to the 2012 rate was primarily due to an increase in earnings in jurisdictions outside the United States as well as an internal restructuring that occurred during the fourth quarter of 2012. This restructuring was undertaken within our non-U.S. operations to align our global structure for more efficient treasury management and global cash deployment.
During the third quarter of 2013, Massachusetts enacted a statute that changed how sales are apportioned from being a cost of performance measure to market based sourcing. The impact of such will decrease our overall state tax provision in 2014. Additionally, the United Kingdom statutory tax rate is set to decrease from 23% to 21% effective April 1, 2014, which will also reduce our effective tax rate.
2012 vs. 2011
Our effective tax rate was lower than the 35% federal statutory rate primarily due to earnings in jurisdictions outside the United States, where our effective tax rate is lower, which was partially offset by state income taxes and accruals on uncertain tax positions. The change in the effective rate for 2012 compared to the 2011 rate was primarily due to an increase in earnings in jurisdictions outside the United States and a decrease in state income taxes, as well as the internal restructuring.
Liquidity and Capital Resources
The following section explains how we have generated and used our cash historically, describes our current capital resources and discusses our future financial commitments.
Cash Requirements
The following table aggregates our material contractual obligations and minimum commercial commitments as of December 31, 2013:
By Period | ||||||||||||||||||||
Total | Less than 1 year |
1 to 3 years | 3 to 5 years | More than 5 years |
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(in millions) | ||||||||||||||||||||
Term Loan (1) |
$ | 340 | $ | 40 | $ | 300 | $ | | $ | | ||||||||||
Expected interest payments on Term Loan (1) |
14 | 5 | 9 | | | |||||||||||||||
Chinese credit facilities (1) |
28 | 28 | | | | |||||||||||||||
Operating leases |
86 | 13 | 19 | 16 | 38 | |||||||||||||||
Build to suit lease obligation (2) |
144 | | 10 | 19 | 115 | |||||||||||||||
Purchase obligations (3) |
1 | 1 | | | | |||||||||||||||
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Total (4)(5)(6) |
$ | 613 | $ | 87 | $ | 338 | $ | 35 | $ | 153 | ||||||||||
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(1) | The amounts included as expected interest payments on the Term Loan in this table are based on the current effective interest rate and payment terms as of December 31, 2013, but, could change significantly in the |
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future. Amounts assume that our existing debt is repaid at maturity and do not assume additional borrowings or refinancings of existing debt. See Note 8Debt in the notes to the consolidated and combined financial statements for additional information on our Term Loan and Chinese Credit Facilities. |
(2) | Estimated future minimum rental payments for our future corporate headquarters in Needham, MA. See discussion under Office Lease Commitments below. |
(3) | Excludes amounts already recorded on the consolidated balance sheet at December 31, 2013. |
(4) | Excluded from the table was $38 million of unrecognized tax benefits, including interest and penalties, that we have recorded in other long-term liabilities for which we cannot make a reasonably reliable estimate of the amount and period of payment. We estimate that none of these amounts will be paid within the next twelve months. |
(5) | In connection with the Spin-Off, we assumed Expedias obligation to fund a charitable foundation. The Board of Directors of the charitable foundation is currently comprised of Stephen Kaufer- President and Chief Executive Officer, Julie M.B. Bradley-Chief Financial Officer and Seth J. Kalvert- Senior Vice President, General Counsel and Secretary. Our obligation was calculated at 2.0% of OIBA in 2013. For a discussion regarding OIBA see Note 16Segment Information in the notes to the consolidated and combined financial statements. This future commitment has been excluded from the table above. |
(6) | Excludes spending on anticipated leasehold improvements on our Needham, Massachusetts lease, including design, development, construction costs, and the purchase and installation of equipment, net of related Landlord incentives, which we estimate will begin in the fourth quarter of 2014 thru the second quarter of 2015 and currently estimate will cost in the range of $35-$40 million. |
Term Loan Facility Due 2016 and Revolving Credit Facility
On December 20, 2011, in connection with the Spin-Off, we entered into the Credit Agreement, which provides $600 million of borrowing including:
| the Term Loan Facility, or Term Loan, in an aggregate principal amount of $400 million with a term of five years due December 2016; and |
| the Revolving Credit Facility in an aggregate principal amount of $200 million available in U.S. dollars, Euros and British pound sterling with a term of five years expiring December 2016. |
The Term Loan and any loans under the Revolving Credit Facility bear interest by reference to a base rate or a Eurocurrency rate, in either case plus an applicable margin based on our leverage ratio. We are also required to pay a quarterly commitment fee, on the average daily unused portion of the Revolving Credit Facility for each fiscal quarter and fees in connection with the issuance of letters of credit. The Term Loan and loans under the Revolving Credit Facility currently bear interest at LIBOR plus 150 basis points, or the Eurocurrency Spread, or the alternate base rate (ABR) plus 50 basis points, and undrawn amounts are currently subject to a commitment fee of 22.5 basis points.
As of December 31, 2013 we are using a one-month interest period Eurocurrency Spread which is approximately 1.7% per annum. Interest is currently payable on a monthly basis while we are borrowing under the one-month interest rate period. The current interest rates are based on current assumptions, leverage and LIBOR rates and do not take into account that rates will reset periodically. A 25 basis point change in the interest rate on the current Term Loan balance would result in an increase or decrease to interest expense of approximately $0.9 million per annum.
The Revolving Credit Facility includes $40 million of borrowing capacity available for letters of credit and $40 million for borrowings on same-day notice. As of December 31, 2013 there are no outstanding borrowings under our Revolving Credit Facility.
Prepayments
We may voluntarily repay any outstanding borrowing under the Credit Agreement at any time without premium or penalty, other than customary breakage costs with respect to Eurocurrency loans.
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Guarantees
All obligations under the Credit Agreement are unconditionally guaranteed by us and each of our existing and subsequently acquired or organized direct or indirect wholly-owned domestic and foreign restricted subsidiaries, subject to certain exceptions for controlled foreign corporations, foreign subsidiaries where applicable law would otherwise be violated or non-material subsidiaries.
Covenants
The Credit Agreement contains a number of covenants that, among other things, restrict our ability to: incur additional indebtedness, create liens, enter into sale and leaseback transactions, engage in mergers or consolidations, sell or transfer assets, pay dividends and distributions or repurchase our capital stock, make investments, loans or advances, prepay certain subordinated indebtedness, make certain acquisitions, engage in certain transactions with affiliates, amend material agreements governing certain subordinated indebtedness, and change our fiscal year. The Credit Agreement also requires us to maintain a maximum leverage ratio and a minimum cash interest coverage ratio, and contains certain customary affirmative covenants and events of default, including a change of control. If an event of default occurs, the lenders under the Credit Agreement will be entitled to take various actions, including the acceleration of all amounts due under Credit Agreement and all actions permitted to be taken by a secured creditor.
As of December 31, 2013 we believe we are in compliance with all of our debt covenants.
Chinese Credit Facilities
In addition to our borrowings under the Credit Agreement, we maintain our Chinese Credit Facilities. As of December 31, 2013 and 2012, we had $28.5 million and $32.1 million of short term borrowings outstanding, respectively.
Certain of our Chinese subsidiaries entered into a RMB 138,600,000 (approximately $22 million), one-year revolving credit facility with Bank of America (the Chinese Credit FacilityBOA) that is currently subject to review on a periodic basis with no specific expiration period. During the year ended December 31, 2012, this credit line was increased to RMB 189,000,000 (approximately $30 million). During the year ended December 31, 2013, we made a payment inclusive of interest of RMB 68,283,570 (approximately $10.9 million). We currently have $12.7 million of outstanding borrowings from this credit facility as of December 31, 2013. Our Chinese Credit FacilityBOA currently bears interest based at 100% of the Peoples Bank of Chinas base rate and was 5.6% as of December 31, 2013.
In addition, during April 2012, certain of our Chinese subsidiaries entered into a RMB 125,000,000 (approximately $20 million) one-year revolving credit facility with J.P. Morgan Chase Bank (Chinese Credit Facility-JPM). This credit facility was renewed for an additional year in April 2013. During the year ended December 31, 2013, we made a payment inclusive of interest of RMB 24,281,546 (approximately $3.9 million). We currently have $15.8 million of outstanding borrowings from this credit facility as of December 31, 2013. Our Chinese Credit FacilityJPM currently bears interest based at 100% of the Peoples Bank of Chinas base rate and was 5.6% as of December 31, 2013.
Office Lease Commitments
We currently lease approximately 119,000 square feet for our corporate headquarters in Newton, Massachusetts, pursuant to a lease with an expiration date of April 2015. We also lease an aggregate of approximately 382,000 square feet at approximately 30 other locations across North America, Europe and Asia Pacific, primarily for our international management teams, sales offices, and subsidiary headquarters, pursuant to leases with expiration dates through December 2030. We currently have no equipment leases as of December 31, 2013.
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In June 2013, TripAdvisor LLC (TA LLC), our indirect, wholly owned subsidiary, entered into a lease (the Lease), for a new corporate headquarters. Pursuant to the Lease, the landlord will build an approximately 280,000 square foot rental building in Needham, Massachusetts (the Premises), and thereafter lease the Premises to TA LLC as TripAdvisors new corporate headquarters for an initial term of 15 years and 7 months. If the landlord fails to deliver the Premises according to the schedule, subject to certain conditions, TA LLC may be entitled to additional free rent, or in extreme cases, a right to terminate the Lease. Under the Lease, TA LLC is required to pay an initial base rent of $33.00 per square foot per year, increasing to $34.50 per square foot by the final year of the initial term, as well as all real estate taxes and other building operating costs. TA LLC also has an option to extend the term of the Lease for two consecutive terms of five years each.
The aggregate future minimum lease payments are $143.5 million and are currently scheduled to be paid, beginning in November 2015, as follows: $1.1 million for 2015, $9.3 million for 2016, $9.3 million for 2017, $9.3 million for 2018 and $114.6 million for 2019 and thereafter. The Lease has escalating rental payments and initial periods of free rent. TA LLC was also obligated to deliver a letter of credit to the Landlord in the amount of $0.8 million as security deposit, which amount is subject to increase under certain circumstances. TA LLC also has an option to extend the term of the Lease for two consecutive terms of five years each. In connection with the Lease, TripAdvisor entered into a Guaranty (the Guaranty), pursuant to which TripAdvisor provides full payment and performance guaranty for all of TA LLCs obligations under the Lease.
We have concluded we are the deemed owner (for accounting purposes only) of the Premises during the construction period under GAAP build to suit lease accounting. As building construction began in the fourth quarter of 2013, we recorded estimated project construction costs incurred by the landlord as an asset and a corresponding long term liability in Property and equipment, net and Other long-term liabilities, respectively, on our consolidated balance sheets. We will increase the asset and corresponding long term liability as additional building costs are incurred by the landlord during the construction period.
Once the landlord completes the construction of the Premises (estimated to be May 2015), we will evaluate the Lease in order to determine whether or not the Lease meets the criteria for sale-leaseback treatment. If the Lease meets the sale-leaseback criteria, we will remove the asset and the related liability from its consolidated balance sheet and treat the Lease as either an operating or capital lease based on the our assessment of the accounting guidance.
If the Lease does not meet sale-leaseback criteria, we will treat the Lease as a financing obligation and lease payments will be attributed to (1) a reduction of the principal financing obligation; (2) imputed interest expense; and (3) land lease expense (which is considered an operating lease) representing an imputed cost to lease the underlying land of the facility. In addition, the underlying building asset will be depreciated over the buildings estimated useful life. And at the conclusion of the lease term, we would de-recognize both the net book values of the asset and financing obligation. Although we will not begin making lease payments pursuant to the Lease until November 2015, the portion of the lease obligations allocated to the land is treated for accounting purposes as an operating lease that commenced in 2013.
Purchase Obligations
These amounts represent minimum non-cancelable purchase obligations with certain of our vendors, which we expect to utilize in the ordinary course of business.
Letters of Credit
As of December 31, 2013, we have issued unused letters of credit totaling $1 million, related to our property leases.
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Sources and Uses of Cash
Our cash flows from operating, investing and financing activities, as reflected in the consolidated and combined statements of cash flows, are summarized in the following table:
Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in millions) | ||||||||||||
Net cash provided by (used in): |
||||||||||||
Operating activities |
$ | 350 | $ | 239 | $ | 218 | ||||||
Investing activities |
$ | (197 | ) | $ | (244 | ) | $ | (539 | ) | |||
Financing activities |
$ | (170 | ) | $ | 190 | $ | 412 |
Our principal source of liquidity is cash flows generated from operations, although liquidity needs can also be met through drawdowns under our credit facilities discussed above. As of December 31, 2013 and 2012, we had $671 million and $586 million of cash, cash equivalents and short and long-term available-for-sale marketable securities. As of December 31, 2013 approximately $442 million of our cash, cash equivalents and short and long-term marketable securities are held by our international subsidiaries, primarily in the United Kingdom, and are related to earnings we intend to reinvest permanently outside the United States. Cumulative undistributed earnings of foreign subsidiaries that we intend to indefinitely reinvest outside of the United States totaled approximately $481 million as of December 31, 2013. Should we distribute, or be treated under certain U.S. tax rules as having distributed, the earnings of foreign subsidiaries in the form of dividends or otherwise, we may be subject to U.S. income taxes. Determination of the amount of any unrecognized deferred income tax liability on this temporary difference is not practicable because of the complexities of the hypothetical calculation. Cash held is primarily denominated in U.S. dollars.
Historically, the cash we generate has been sufficient to fund our working capital requirements, capital expenditures and to meet our long term debt obligations and other financial commitments. Management believes that our cash and cash equivalents and available for sale marketable securities, combined with expected cash flows generated by operating activities and available cash from our credit facilities will be sufficient to fund our ongoing working capital requirements, capital expenditures, business growth initiatives, meet our long term debt obligations and other financial commitments, fund our new corporate lease obligations, share repurchases and fund any potential acquisitions for at least the next twelve months. However, if during that period or thereafter, we are not successful in generating sufficient cash flow from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, we may be required to reduce our planned capital expenditures and scale back the scope of our business growth initiatives, either of which could have a material adverse effect on our future financial condition or results of operations.
2013 vs. 2012
Operating Activities
For the year ended December 31, 2013, net cash provided by operating activities increased by $111 million or 46% when compared to the same period in 2012, primarily due to an increase in net income of $11 million and an increase in non-cash items not affecting cash flows of $35 million, which is primarily related to increased stock based compensation and depreciation. Working capital movements increased $64 million for the year ended December 31, 2013 when compared to the same period in 2012, primarily due to an increase in operating cashflow from deferred merchant payables of $18 million and lower income tax payments primarily due to a lower effective tax rate with the remaining increase related to the timing of customer receipts, cash receipts from Expedia, income tax payments, and vendor payments.
Investing Activities
For the year ended December 31, 2013, net cash provided by investing activities increased by $47 million when compared to the same period in 2012, primarily due to the sale and maturity of marketable securities of
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$326 million in 2013. This was primarily offset by an increase in the purchases of marketable securities by $213 million, cash paid for 2013 business acquisitions of $35 million, net of cash acquired, and an increase in capital expenditures of $26 million. In addition, we received $7 million during the three months ended March 31, 2012 from Expedia related to Spin-Off, which did not reoccur in 2013.
Financing Activities
For the year ended December 31, 2013, net cash provided by financing activities decreased by $360 million when compared to the same period in 2012 primarily due to an increase of $20 million in principal payments on our Term Loan, payments of $145 million for common stock share repurchases under our authorized share repurchase program, a reduction of $207 million in proceeds related to the exercise of our stock options and warrants, primarily due to one-time warrant proceeds of $215 million during 2012 and the introduction in Q3 2013 of the net share settlement of our stock option exercises, and a $15 million repayment of our outstanding borrowings on our Chinese Credit Facilities in 2013. This was offset by a $10 million repayment of our outstanding borrowing on our Revolving Credit Facility in 2012 that did not reoccur in 2013 and $22 million paid to purchase the remaining shares of our non-controlling interest in 2012 that did not reoccur in 2013.
2012 vs. 2011
Operating Activities
For the year ended December 31, 2012, net cash provided by operating activities increased by $21 million or 10% when compared to the same period in 2011, primarily due to an increase in net income of $17 million and an increase in non-cash items not affecting cash flows of $9 million, which is primarily related to increased stock based compensation, offset by a decrease in working capital movements of $5 million. The decrease in working capital movements in 2012 vs. 2011 was primarily driven by the classification of activity with Expedia of $17 million which was classified in operating activities in 2012, as compared to investing activities in the periods prior to the Spin-Off, offset by the timing of customer cash receipts and the timing of tax and vendor payments.
Investing Activities
For the year ended December 31, 2012, net cash provided by investing activities increased by $295 million when compared to the same period in 2011, primarily due to the cessation of net cash transfers to Expedia related to business operations in the periods prior to the Spin-Off in 2011 of $96 million and a distribution of approximately $406 million to Expedia immediately prior to the Spin-Off in 2011. This was primarily offset by the purchase of $219 million of marketable securities in 2012, as we began purchasing debt securities in the fourth quarter of 2012.
Financing Activities
For the year ended December 31, 2012, net cash provided by financing activities decreased by $222 million when compared to the same period in 2011 primarily due to funding related to our term loan facility borrowing in conjunction with the Spin-Off of $400 million in 2011. This was offset by proceeds from the exercise of our stock options and warrants of $231 million, net of payment of minimum withholding taxes related to the settlement of equity awards of $7 million in 2012. In addition we paid $20 million in principal payments on our Term Loan, a $10 million repayment of our outstanding borrowing on our Revolving Credit Facility, and paid $22 million to purchase the remaining shares of our noncontrolling interest in 2012.
Off-Balance Sheet Arrangements
As of December 31, 2013, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K of the SEC, that have, or are reasonably likely to have, a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
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Contingencies
Legal Proceedings
In the ordinary course of business, we and our subsidiaries are parties to legal proceedings and claims involving alleged infringement of third-party intellectual property rights, defamation, and other claims. Rules of the SEC require the description of material pending legal proceedings, other than ordinary, routine litigation incident to the registrants business, and advise that proceedings ordinarily need not be described if they primarily involve damages claims for amounts (exclusive of interest and costs) not individually exceeding 10% of the current assets of the registrant and its subsidiaries on a consolidated basis. In the judgment of management, none of the pending litigation matters that the Company and its subsidiaries are defending involves or is likely to involve amounts of that magnitude. There may be claims or actions pending or threatened against us of which we are currently not aware and the ultimate disposition of which could have a material adverse effect on us.
Related Party Transactions
For information on our relationships with Expedia and Liberty Interactive Corporation refer to Note 15Related Party Transactions in the notes to our consolidated and combined financial statements.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those that we believe are important in the preparation of our consolidated and combined financial statements because they require that management use judgment and estimates in applying those policies. We prepare our consolidated and combined financial statements and accompanying notes in accordance with GAAP.
Preparation of the consolidated and combined financial statements and accompanying notes requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated and combined financial statements as well as revenue and expenses during the periods reported. Management bases its estimates on historical experience, where applicable, and other assumptions that it believes are reasonable under the circumstances. Actual results may differ from estimates under different assumptions or conditions.
There are certain critical estimates that we believe require significant judgment in the preparation of the consolidated and combined financial statements. We consider an accounting estimate to be critical if:
| It requires us to make an assumption because information was not available at the time or it included matters that were highly uncertain at the time management was making the estimate; and/or |
| Changes in the estimate or different estimates that management could have selected may have had a material impact on our financial condition or results of operations. |
Our significant accounting policies and estimates are more fully described in Note 2Significant Accounting Policies in the notes to our consolidated and combined financial statements. A discussion of information about the nature and rationale for our critical accounting estimates is below.
Business Combination Valuations and Recoverability of Goodwill, Indefinite and Definite-Lived Intangible Assets
Goodwill. We account for acquired businesses using the purchase method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. We assess goodwill, which is not amortized, for impairment annually as of October 1, or more frequently, if events and circumstances indicate impairment may have occurred. We test goodwill for impairment
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at the reporting unit level (operating segment or one level below an operating segment). We have one operating and reportable segment. The segment is determined based on how our chief operating decision maker manages our business, makes operating decisions and evaluates operating performance.
In the evaluation of goodwill for impairment, we first perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount. If we determine that it is not more likely than not that the fair value of goodwill is less than its carrying amount, no further testing is necessary. If, however, we determine that it is more likely than not that the fair value of goodwill is less than its carrying amount, we then perform a quantitative assessment and compare the fair value of the reporting unit to the carrying value. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and we proceed to step two of the impairment analysis. In step two of the analysis, we will record an impairment loss equal to the excess of the carrying value of the reporting units goodwill over its implied fair value should such a circumstance arise.
Indefinite-Lived Intangible Assets. Intangible assets that have indefinite lives are not amortized and are tested for impairment annually on October 1, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Similar to the qualitative assessment for goodwill, we may assess qualitative factors to determine if it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount. If we determine that it is not more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, no further testing is necessary. If, however, we determine that it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, we compare the fair value of the indefinite-lived asset with its carrying amount. If the carrying value of an individual indefinite-lived intangible asset exceeds its fair value, the individual asset is written down by an amount equal to such excess. The assessment of qualitative factors is optional and at our discretion. We may bypass the qualitative assessment for any indefinite-lived intangible asset in any period and resume performing the qualitative assessment in any subsequent period.
As part of our qualitative assessment for our 2013 impairment analysis, the factors that we considered for our goodwill and indefinite-lived intangible assets included, but were not limited to: (a) changes in macroeconomic conditions in the overall economy and the specific markets in which we operate, (b) our ability to access capital, (c) changes in the online travel industry, (d) changes in the level of competition, (e) comparison of our current financial performance to historical and budgeted results, (f) changes in excess market capitalization over book value based on our current common stock price and latest consolidated balance sheet, and (g) comparison of the excess of the fair value of our of trade names and trademarks to the carrying value of those same assets, using the results of our most recent quantitative assessment. After considering these factors and the impact that changes in such factors would have on the inputs used in our previous quantitative assessment, we determined for our goodwill and indefinite-lived intangible assets that it was more likely than not that these assets were not impaired. Therefore no impairment charges were recognized to our consolidated statement of operations during the year ended December 31, 2013 for our goodwill or indefinite-lived intangible assets.
Since the annual impairment tests in October 2013, there have been no events or changes in circumstances to indicate any potential impairment and our goodwill and indefinite lived intangibles are not currently considered at risk. In the event that future circumstances indicate that any portion of our goodwill or our indefinite-lived intangibles is impaired, an impairment analysis would be performed.
Definite-Lived Intangible Assets. Intangible assets with definite lives and other long-lived assets are carried at cost and are amortized on a straight-line basis over their estimated useful lives of two to eleven years. The straight-line method of amortization is currently used for our definite-lived intangible assets as it approximates, or is our best estimate, of the distribution of the economic use of our identifiable intangible assets. We review the carrying value of long-lived assets or asset groups, including property and equipment, to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable.
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Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset, or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we assess the recoverability of the asset by determining if the carrying value of the asset exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the asset over the remaining economic life of the asset. If the recoverability test indicates that the carrying value of the asset is not recoverable, we will estimate the fair value of the asset using appropriate valuation methodologies which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the assets carrying amount and its estimated fair value. We have not identified any circumstances that would warrant an impairment assessment as of December 31, 2013.
For additional information on our goodwill, indefinite-lived intangibles and definite-lived intangibles refer to Note 7Goodwill and Intangible Assets, net in the notes to our consolidated and combined financial statements.
Income Taxes
We compute and account for our income taxes on a separate tax return basis. We record income taxes under the liability method. Deferred tax assets and liabilities reflect our estimation of the future tax consequences of temporary differences between the carrying amounts of assets and liabilities for book and tax purposes. We determine deferred income taxes based on the differences in accounting methods and timing between financial statement and income tax reporting. Accordingly, we determine the deferred tax asset or liability for each temporary difference based on the enacted tax rates expected to be in effect when we realize the underlying items of income and expense. We consider all relevant factors when assessing the likelihood of future realization of our deferred tax assets, including our recent earnings experience by jurisdiction, expectations of future taxable income and the carryforward periods available to us for tax reporting purposes, as well as assessing available tax planning strategies. We may establish a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized. Due to inherent complexities arising from the nature of our businesses, future changes in income tax law, tax sharing agreements or variances between our actual and anticipated operating results, we make certain judgments and estimates. Therefore, actual income taxes could materially vary from these estimates.
We record liabilities to address uncertain tax positions we have taken in previously filed tax returns or that we expect to take in a future tax return. The determination for required liabilities is based upon an analysis of each individual tax position, taking into consideration whether it is more likely than not that our tax position, based on technical merits, will be sustained upon examination. For those positions for which we conclude it is more likely than not it will be sustained, we recognize the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority. The difference between the amount recognized and the total tax position is recorded as a liability. The ultimate resolution of these tax positions may be greater or less than the liabilities recorded.
We have not provided for deferred U.S. income taxes on undistributed earnings of certain foreign subsidiaries that we intend to reinvest permanently outside the United States. Should we distribute earnings of foreign subsidiaries in the form of dividends or otherwise, we may be subject to U.S. income taxes. Due to complexities in tax laws and various assumptions that would have to be made, it is not practicable, at this time, to estimate the amount of unrecognized deferred U.S. taxes on these earnings.
See Note 9Income Taxes in the notes to our consolidated and combined financial statements for further information on income taxes.
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Stock-Based Compensation
Stock Options
The exercise price for all stock options granted by us to date has been equal to the market price of the underlying shares of common stock at the date of grant. In this regard, when making stock option awards, our practice is to determine the applicable grant date and to specify that the exercise price shall be the closing price of our common stock on the date of grant. Stock options granted during the year ended December 31, 2013 had a term of ten years from the date of grant and generally vest over a four-year requisite service period.
During the year ended December 31, 2013, we issued 2,824,583 of primarily service based stock options under the 2011 Incentive Plan with a weighted average grant-date fair value per option of $28.30. We will amortize the fair value, net of estimated forfeitures, as stock-based compensation expense over the vesting term on a straight-line basis, with the amount of compensation expense recognized at any date at least equaling the portion of the grant-date fair value of the award that is vested at that date. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.
The estimated fair value of the options granted under the 2011 Incentive Plan to date, have been calculated using a Black-Scholes Merton option-pricing model (Black-Scholes model). The Black-Scholes model incorporates assumptions to value stock-based awards, which includes the risk-free rate of return, expected volatility, expected term and expected dividend yield.
Our risk-free interest rate is based on the rates currently available on zero-coupon U.S. Treasury issues, in effect at the time of the grant, whose remaining maturity period most closely approximates the stock options expected term assumption. We estimate volatility of our common stock by using an average of our historical stock price volatility and of publicly traded companies that we consider peers based on daily price observations over a period equivalent to or approximate to the expected term of the stock option grants. The decision to use a weighted average volatility factor with our peer group was based upon the relatively short period of availability of data on our common stock. We estimate our expected term using the simplified method for all stock options as we do not have sufficient historical exercise data on our common stock. Our expected dividend yield is zero, as we have not paid any dividends on our common stock to date and do not expect to pay any cash dividends for the foreseeable future.
Restricted Stock Units (RSUs)
RSUs are stock awards that are granted to employees entitling the holder to shares of our common stock as the award vests. RSUs are measured at fair value based on the number of shares granted and the quoted price of our common stock at the date of grant. We amortize the fair value, net of estimated forfeitures, as stock-based compensation expense over the vesting term on a straight-line basis, with the amount of compensation expense recognized at any date at least equaling the portion of the grant-date fair value of the award that is vested at that date.
Performance-based stock options and RSUs vest upon achievement of certain company-based performance conditions and a requisite service period. On the date of grant, the fair value of performance-based awards is determined, which is calculated using the same method as our service based stock options and RSUs described above. We then assess whether it is probable that the performance targets would be achieved. If assessed as probable, compensation expense will be recorded for these awards over the estimated performance period. At each reporting period, we will reassess the probability of achieving the performance targets and the performance period required to meet those targets. The estimation of whether the performance targets will be achieved and of the performance period required to achieve the targets requires judgment, and to the extent actual results or
61
updated estimates differ from our current estimates, the cumulative effect on current and prior periods of those changes will be recorded in the period estimates are revised, or the change in estimate will be applied prospectively depending on whether the change affects the estimate of total compensation cost to be recognized or merely affects the period over which compensation cost is to be recognized. The ultimate number of shares issued and the related compensation expense recognized will be based on a comparison of the final performance metrics to the specified targets.
Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive these awards, and subsequent events are not indicative of the reasonableness of our original estimates of fair value. We have considered many factors when estimating expected forfeitures, including our historical attrition rates, the employee class and historical experience. The estimate of stock awards that will ultimately be forfeited requires significant judgment and, to the extent that actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period such estimates are revised.
Refer to Note 4Stock Based Awards and Other Equity Instruments in the notes to our consolidated and combined financial statements for further information on current year equity award activity.
Websites and Internal Use Software Development Costs
We capitalize certain costs incurred during the application development stage related to the development of websites and internal use software when it is probable the project will be completed and the software will be used as intended. Such costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally estimated to be three to five years. Capitalized costs include internal and external costs, if direct and incremental, and deemed by management to be significant. We expense costs related to the planning and post-implementation phases of software and website development as these costs are incurred. Maintenance and enhancement costs (including those costs in the post-implementation stages) are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the website or software resulting in added functionality, in which case the costs are capitalized. To the extent that we change the manner in which we develop and test new features and functionalities related to our websites and internal use software, assess the ongoing value of capitalized assets or determine the estimated useful lives over which the costs are amortized, the amount of website and internal use software development costs we capitalize and amortize could change in future periods.
Refer to Note 6Fixed Assets in the notes to our consolidated and combined financial statements for further information on our development of websites and internal use software.
Recently Adopted Accounting Pronouncements
For a discussion of new accounting pronouncements, see Note 2Significant Accounting Policies in the notes to our consolidated and combined financial statements.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Market Risk Management
We are exposed to certain market risks, including changes in interest rates and foreign currency exchange rates that could adversely affect our results of operations or financial condition. We manage our exposure to these risks through established policies and procedures and by assessing the anticipated near-term and long-term fluctuations in interest rates and foreign currency exchange rates. Our objective is to mitigate potential income statement, cash flow and market exposures from changes in interest and foreign exchange rates.
62
Interest Rates
Our current exposure to changes in interest rates relate primarily to our investment portfolio and the outstanding principal on our Term Loan. Our interest income and expense is most sensitive to fluctuations in U.S. interest rates and Libor. Changes in interest rates affect the interest earned on our cash, cash equivalents and marketable securities and the fair value of those securities, as well as the amount of interest we pay on our outstanding debt.
We currently invest our excess cash in cash deposits at major global banks, money market mutual funds and marketable securities. Our investment policy and strategy are focused on preservation of capital and supporting our liquidity requirements. We invest in highly-rated securities, and our investment policy limits the amount of credit exposure to any one issuer. The policy requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss.
In order to provide a meaningful assessment of the interest rate risk associated with our investment portfolio, we performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of our current investment portfolio assuming a 100 basis point parallel shift in the yield curve. Based on our investment positions as of December 31, 2013, a hypothetical 100 basis point increase in interest rates across all maturities would result in an approximate $3.4 million incremental decline in the fair market value of the portfolio. Such losses would only be realized if we sold the investments prior to maturity.
As of December 31, 2013, we had $340 million of debt under our Term Loan, which has a variable rate. The variable interest rate on the Term Loan is based on current assumptions, leverage and LIBOR rates. Based on our current loan balance through December 31, 2013, a 25 basis point change in our interest rate on the Term Loan would result in an increase or decrease to interest expense of approximately $0.9 million per annum. We currently do not hedge our interest rate risk; however, we are continually evaluating the interest rate market, and if we become increasingly exposed to potentially volatile movements in interest rates, and if these movements are material, this could cause us to adjust our financing strategy.
We did not experience any significant impact from changes in interest rates for the years ended December 31, 2013, 2012 or 2011.
Foreign Currency Exchange Rates
We conduct business in certain international markets, primarily the European Union, the United Kingdom, Singapore and China. Because we operate in international markets, we have exposure to different economic climates, political arenas, tax systems and regulations that could affect foreign exchange rates.
Some of our foreign subsidiaries maintain their accounting records in their respective local currencies other than the U.S. dollar (primarily in British pound sterling). Consequently, changes in currency exchange rates may impact the translation of foreign financial statements into U.S. dollars. As a result, we face exposure to adverse movements in currency exchange rates as the financial results of our international operations are translated from local currency, or functional currency, into U.S. dollars upon consolidation. If the U.S. dollar weakens against the local currency, the translation of these foreign-currency-denominated balances will result in increased net assets, revenue, operating expenses, operating income and net income. Similarly, our net assets, revenue, operating expenses, operating income and net income will decrease if the U.S. dollar strengthens against local currency. The effect of foreign exchange on our business historically has varied from quarter to quarter and may continue to do so, potentially materially. A hypothetical 10% decrease of the foreign exchange rates relative to the U.S. Dollar, or strengthening of the U.S. Dollar, would generate an unrealized loss of approximately $1.6 million related to an decrease in our net assets held in functional currencies other than the U.S. Dollar as of December 31, 2013, which would be recorded to accumulated other comprehensive loss on our consolidated balance sheet.
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In addition, foreign exchange rate fluctuations on transactions denominated in currencies other than the functional currency result in gains and losses. We recognize these transactional gains and losses (primarily Euro currency transactions) in our consolidated and combined statements of operations and have recorded foreign exchange losses of $0.2 million, $3.2 million and $1.0 million for the years ended December 31, 2013, 2012 and 2011, respectively, in Other, net on our consolidated and combined statements of operations.
We currently manage our exposure to foreign currency risk through internally established policies and procedures. To the extent practicable, we minimize our foreign currency exposures by maintaining natural hedges between our current assets and current liabilities in similarly denominated foreign currencies, as well as, using derivative financial instruments. We use foreign exchange derivative contracts to manage certain short-term foreign currency risk to try and reduce the effects of fluctuating foreign currency exchange rates on our cash flows denominated in foreign currencies.
Our objective is to hedge only those currency exposures that can be confidently identified and quantified and that may result in significant impacts to corporate cash or the consolidated statement of operations. Our policy does not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposures. We do not use financial instruments for trading purposes and are not a party to any leveraged derivatives.
Our current derivative contracts principally address foreign exchange fluctuation risk for the Euro versus the U.S. Dollar. We account for our derivative instruments as either assets or liabilities and carry them at fair value.
As of December 31, 2013 and 2012, we had outstanding forward currency contracts not designated as hedging contracts with a notional value of $5.2 million and $2.7 million. These contracts are all short-term in nature. The fair value of these derivatives at both December 31, 2013 and 2012, represented a net liability of $0.1 million and are recorded in accrued expenses and other current liabilities on our consolidated balance sheets. For the years ended December 31, 2013 and 2012, $0.3 million and $0.7 million, respectively, of expense was recorded to Other, net on our consolidated and combined statements of operations related to derivative contracts. A hypothetical 10% change of the foreign exchange rates relative to the U.S. Dollar, with all other variables held constant, would not have a material impact on the fair value of our outstanding derivatives as of December 31, 2013 and 2012. We did not enter into any derivative instruments for the year ending December 31, 2011. Refer to Note 5Financial Instruments in the notes to the consolidated and combined financial statements for further detail on our derivative instruments.
As we increase our operations in international markets, our exposure to potentially volatile movements in foreign currency exchange rates increases. The economic impact to us of foreign currency exchange rate movements is linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause us to adjust our foreign currency risk strategies.
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Item 8. | Financial Statements and Supplementary Data |
Index to Financial Statements and Supplementary Data: |
||||
66 | ||||
67 | ||||
68 | ||||
Consolidated Balance Sheets as of December 31, 2013 and 2012 |
69 | |||
70 | ||||
72 | ||||
73 | ||||
110 |
65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
of TripAdvisor, Inc.
We have audited the accompanying consolidated balance sheets of TripAdvisor, Inc. as of December 31, 2013 and 2012, and the related consolidated and combined statements of operations, comprehensive income, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TripAdvisor, Inc. at December 31, 2013 and 2012, and the consolidated and combined results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), TripAdvisor, Inc.s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 11, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 11, 2014
66
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Revenue |
$ | 727,236 | $ | 559,215 | $ | 426,045 | ||||||
Revenue from Expedia |
217,425 | 203,751 | 211,018 | |||||||||
|
|
|
|
|
|
|||||||
Total revenue |
944,661 | 762,966 | 637,063 | |||||||||
Costs and expenses: |
||||||||||||
Cost of revenue (exclusive of amortization) (1) |
17,714 | 12,074 | 10,873 | |||||||||
Selling and marketing (2) |
368,353 | 266,239 | 209,176 | |||||||||
Technology and content (2) |
130,673 | 86,640 | 57,448 | |||||||||
General and administrative (2) |
98,121 | 75,641 | 44,770 | |||||||||
Depreciation |
29,495 | 19,966 | 18,362 | |||||||||
Amortization of intangible assets |
5,731 | 6,110 | 7,523 | |||||||||
Shared services fee with Expedia |
| | 9,222 | |||||||||
Spin-off costs |
| | 6,932 | |||||||||
|
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|
|
|
|
|||||||
Total costs and expenses |
650,087 | 466,670 | 364,306 | |||||||||
|
|
|
|
|
|
|||||||
Operating income |
294,574 | 296,296 | 272,757 | |||||||||
Other income (expense): |
||||||||||||
Interest income |
1,738 | 510 | 808 | |||||||||
Interest expense |
(10,074 | ) | (11,381 | ) | (417 | ) | ||||||
Other, net |
(1,536 | ) | (3,450 | ) | (1,254 | ) | ||||||
|
|
|
|
|
|
|||||||
Total other expense, net |
(9,872 | ) | (14,321 | ) | (863 | ) | ||||||
|
|
|
|
|
|
|||||||
Income before income taxes |
284,702 | 281,975 | 271,894 | |||||||||
Provision for income taxes |
(79,259 | ) | (87,387 | ) | (94,103 | ) | ||||||
|
|
|
|
|
|
|||||||
Net income |
205,443 | 194,588 | 177,791 | |||||||||
Net (income) loss attributable to noncontrolling interest |
| (519 | ) | (114 | ) | |||||||
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|
|
|
|
|
|||||||
Net income attributable to TripAdvisor, Inc. |
$ | 205,443 | $ | 194,069 | $ | 177,677 | ||||||
|
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|
|
|
|
|||||||
Earnings Per Share attributable to TripAdvisor, Inc: |
||||||||||||
Basic |
$ | 1.44 | $ | 1.39 | $ | 1.33 | ||||||
Diluted |
$ | 1.41 | $ | 1.37 | $ | 1.32 | ||||||
Weighted Average Common Shares Outstanding: |
||||||||||||
Basic |
142,854 | 139,462 | 133,461 | |||||||||
Diluted |
145,263 | 141,341 | 134,865 |
(1) Excludes amortization as follows: |
||||||||||||
Amortization of acquired technology included in amortization of intangibles |
$ | 949 | $ | 708 | $ | 578 | ||||||
Amortization of website development costs included in depreciation |
19,602 | 12,816 | 12,438 | |||||||||
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|
|
|
|||||||
$ | 20,551 | $ | 13,524 | $ | 13,016 | |||||||
(2) Includes stock-based compensation as follows: |
||||||||||||
Selling and marketing |
$ | 10,643 | $ | 4,622 | $ | 3,216 | ||||||
Technology and content |
21,053 | 11,400 | 3,931 | |||||||||
General and administrative |
17,257 | 14,080 | 10,197 |
The accompanying notes are an integral part of these consolidated and combined financial statements.
67
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Net income |
$ | 205,443 | $ | 194,588 | $ | 177,791 | ||||||
Other comprehensive income (loss), net of tax: |
||||||||||||
Foreign currency translation adjustments |
548 | 1,945 | (781 | ) | ||||||||
Unrealized gains (losses) on available for sale securities, net of tax benefits of $6, $72, and $0, (1) |
(4 | ) | (104 | ) | | |||||||
|
|
|
|
|
|
|||||||
Total other comprehensive income (loss), net of tax |
544 | 1,841 | (781 | ) | ||||||||
|
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|
|
|
|
|||||||
Comprehensive income |
205,987 | 196,429 | 177,010 | |||||||||
Less: comprehensive income attributable to noncontrolling interest |
| (519 | ) | (114 | ) | |||||||
|
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|
|
|
|
|||||||
Comprehensive income attributable to TripAdvisor, Inc. |
$ | 205,987 | $ | 195,910 | $ | 176,896 | ||||||
|
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|
|
|
|
(1) | Net gains (losses) recognized and reclassified during the years ended December 31, 2013, 2012 and 2011 were immaterial. |
The accompanying notes are an integral part of these consolidated and combined financial statements.
68
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, 2013 |
December 31, 2012 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 351,148 | $ | 367,515 | ||||
Short-term marketable securities (note 5) |
131,220 | 118,970 | ||||||
Accounts receivable, net of allowance of $3,300 and $2,818 at December 31, 2013 and December 31, 2012, respectively (note 2) |
97,034 | 81,459 | ||||||
Receivable from Expedia, net (note 15) |
15,828 | 23,971 | ||||||
Taxes receivable (note 9) |
14,291 | 24,243 | ||||||
Deferred income taxes, net (note 9) |
4,550 | 5,971 | ||||||
Prepaid expenses and other current assets |
16,214 | 10,365 | ||||||
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|
|
|||||
Total current assets |
630,285 | 632,494 | ||||||
Long-term marketable securities (note 5) |
188,338 | 99,248 | ||||||
Property and equipment, net (note 6) |
81,528 | 43,802 | ||||||
Deferred income taxes, net (note 9) |
893 | 502 | ||||||
Other long-term assets |
18,144 | 13,274 | ||||||
Intangible assets, net (note 7) |
51,842 | 38,190 | ||||||
Goodwill (note 7) |
501,984 | 471,684 | ||||||
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|
|||||
TOTAL ASSETS |
$ | 1,473,014 | $ | 1,299,194 | ||||
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|
|||||
LIABILITIES AND EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 9,869 | $ | 12,796 | ||||
Deferred merchant payables (note 2) |
29,612 | 1,303 | ||||||
Deferred revenue |
43,970 | 31,563 | ||||||
Credit facility borrowings (note 8) |
28,461 | 32,145 | ||||||
Borrowings, current (note 8) |
40,000 | 40,000 | ||||||
Taxes payable (note 9) |
5,443 | 14,597 | ||||||
Accrued expenses and other current liabilities (note 10) |
85,534 | 63,236 | ||||||
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|
|
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Total current liabilities |
242,889 | 195,640 | ||||||
Deferred income taxes, net (note 9) |
13,114 | 11,023 | ||||||
Other long-term liabilities (note 11) |
52,531 | 25,563 | ||||||
Borrowings, net of current portion (note 8) |
300,000 | 340,000 | ||||||
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|
|
|
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Total Liabilities |
608,534 | 572,226 | ||||||
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|
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Commitments and Contingencies (note 12) |
||||||||
Stockholders equity: (note 14) |
||||||||
Preferred stock $0.001 par value |
| | ||||||
Authorized shares: 100,000,000 |
||||||||
Shares issued and outstanding: 0 and 0 |
||||||||
Common stock $0.001 par value |
131 | 130 | ||||||
Authorized shares: 1,600,000,000 |
||||||||
Shares issued: 131,537,798 and 130,060,138 |
||||||||
Shares outstanding: 129,417,089 and 130,060,138 |
||||||||
Class B common stock $0.001 par value |
13 | 13 | ||||||
Authorized shares 400,000,000 |
||||||||
Shares issued and outstanding: 12,799,999 and 12,799,999 |
||||||||
Additional paid-in capital |
608,001 | 531,256 | ||||||
Retained earnings |
401,881 | 196,438 | ||||||
Accumulated other comprehensive loss |
(325 | ) | (869 | ) | ||||
Treasury stockCommon stock, at cost, 2,120,709 and 0 shares, at December 31, 2013 and December 31, 2012 respectively |
(145,221 | ) | | |||||
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|
|
|||||
Total stockholders equity |
864,480 | 726,968 | ||||||
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|
|||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 1,473,014 | $ | 1,299,194 | ||||
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|
|
The accompanying notes are an integral part of these consolidated financial statements.
69
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(in thousands, except share data)
Invested Capital |
Common stock | Class B common stock |
Additional paid-in capital |
Retained earnings |
Accumulated other comprehensive (loss) income |
Treasury stock | Total | |||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2010 |
$ | 541,561 | | $ | | | $ | | $ | | $ | | $ | (1,929 | ) | | $ | | $ | 539,632 | ||||||||||||||||||||||||
Net income attributable to TripAdvisor, Inc. prior to Spin-Off |
175,308 | 175,308 | ||||||||||||||||||||||||||||||||||||||||||
Net income attributable to TripAdvisor, Inc. after the Spin-Off |
2,369 | 2,369 | ||||||||||||||||||||||||||||||||||||||||||
Currency translation adjustments |
(781 | ) | (781 | ) | ||||||||||||||||||||||||||||||||||||||||
Tax benefits on equity awards |
1,453 | 1,453 | ||||||||||||||||||||||||||||||||||||||||||
Stock- based compensation expense- pre-Spin-Off |
16,260 | 16,260 | ||||||||||||||||||||||||||||||||||||||||||
Acquisition of common control subsidiary from Expedia |
(40,564 | ) | (40,564 | ) | ||||||||||||||||||||||||||||||||||||||||
Adjustment to the fair value of redeemable noncontrolling interest |
(571 | ) | (571 | ) | ||||||||||||||||||||||||||||||||||||||||
Extinguishment of receivable due from Expedia related to Spin- Off, including transfers of assets and liabilities |
(1,525 | ) | (1,525 | ) | ||||||||||||||||||||||||||||||||||||||||
Distribution to Expedia related to Spin-Off, net |
(398,488 | ) | (398,488 | ) | ||||||||||||||||||||||||||||||||||||||||
Capitalization of TripAdvisor as a result of Spin-Off from Expedia, including issuance of Common and Class B shares |
(293,434 | ) | 120,661,808 | 121 | 12,799,999 | 13 | 293,300 | | ||||||||||||||||||||||||||||||||||||
Stock-based compensation expense- post Spin-Off |
444 | 444 | ||||||||||||||||||||||||||||||||||||||||||
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Balance as of December 31, 2011 |
$ | | 120,661,808 | $ | 121 | 12,799,999 | $ | 13 | $ | 293,744 | $ | 2,369 | $ | (2,710 | ) | | $ | | $ | 293,537 | ||||||||||||||||||||||||
Net income attributable to TripAdvisor, Inc. |
194,069 | 194,069 | ||||||||||||||||||||||||||||||||||||||||||
Currency translation adjustments |
1,945 | 1,945 | ||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on marketable securities, net of tax |
(104 | ) | (104 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of common stock related to exercise of options and warrants and vesting of RSUs |
9,398,330 | 9 | 230,702 | 230,711 | ||||||||||||||||||||||||||||||||||||||||
Tax benefits on equity awards |
3,933 | 3,933 | ||||||||||||||||||||||||||||||||||||||||||
Minimum withholding taxes on net share settlements of equity awards |
(6,675 | ) | (6,675 | ) | ||||||||||||||||||||||||||||||||||||||||
Adjustment to the fair value of redeemable noncontrolling interest |
(14,617 | ) | (14,617 | ) | ||||||||||||||||||||||||||||||||||||||||
Reclassification of non-employee equity awards to liability |
(1,462 | ) | (1,462 | ) | ||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense |
25,631 | 25,631 | ||||||||||||||||||||||||||||||||||||||||||
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70
Invested Capital |
Common stock | Class B common stock |
Additional paid-in capital |
Retained earnings |
Accumulated other comprehensive (loss) income |
Treasury stock | Total | |||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2012 |
$ | | 130,060,138 | $ | 130 | 12,799,999 | $ | 13 | $ | 531,256 | $ | 196,438 | $ | (869 | ) | | $ | | $ | 726,968 | ||||||||||||||||||||||||
Net income attributable to TripAdvisor, Inc. |
205,443 | 205,443 | ||||||||||||||||||||||||||||||||||||||||||
Currency translation adjustments |
548 | 548 | ||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on marketable securities, net of tax and reclassification adjustments |
(4 | ) | (4 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of common stock related to exercise of options and vesting of RSUs |
1,477,660 | 1 | 27,067 | 27,068 | ||||||||||||||||||||||||||||||||||||||||
Repurchase of common stock |
(2,120,709 | ) | $ | (145,221 | ) | (145,221 | ) | |||||||||||||||||||||||||||||||||||||
Tax benefits on equity awards |
12,227 | 12,227 | ||||||||||||||||||||||||||||||||||||||||||
Minimum withholding taxes on net share settlements of equity awards |
(13,907 | ) | (13,907 | ) | ||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense |
51,358 | 51,358 | ||||||||||||||||||||||||||||||||||||||||||
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Balance as of December 31, 2013 |
$ | | 131,537,798 | $ | 131 | 12,799,999 | $ | 13 | $ | 608,001 | $ | 401,881 | $ | (325 | ) | (2,120,709 | ) | $ | (145,221 | ) | $ | 864,480 | ||||||||||||||||||||||
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The accompanying notes are an integral part of these consolidated and combined financial statements.
71
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Operating activities: |
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Net income |
$ | 205,443 | $ | 194,588 | $ | 177,791 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation of property and equipment, including amortization of internal-use software and website development |
29,495 | 19,966 | 18,362 | |||||||||
Stock-based compensation |
48,953 | 30,102 | 17,344 | |||||||||
Amortization of intangible assets |
5,731 | 6,110 | 7,523 | |||||||||
Amortization of deferred financing costs |
779 | 889 | 21 | |||||||||
Amortization of discounts and premiums on marketable securities, net |
4,905 | 527 | | |||||||||
Deferred tax (benefit) expense |
5,473 | (4,960 | ) | (931 | ) | |||||||
Excess tax benefits from stock-based compensation |
(12,425 | ) | (2,717 | ) | (1,571 | ) | ||||||
Provision (recovery) for doubtful accounts |
1,485 | (1,050 | ) | 909 | ||||||||
Foreign currency transaction (gains) losses, net |
(154 | ) | 1,644 | 209 | ||||||||
Other, net |
1,691 | 187 | (131 | ) | ||||||||
Changes in operating assets and liabilities, net of effects from acquisitions: |
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Accounts receivable |
(16,184 | ) | (11,810 | ) | (15,910 | ) | ||||||
Receivable from Expedia,net |
8,099 | (16,921 | ) | | ||||||||
Taxes receivable |
9,952 | (24,243 | ) | | ||||||||
Prepaid expenses and other assets |
(3,655 | ) | (3,305 | ) | (1,821 | ) | ||||||
Accounts payable |
(5,884 | ) | 15,322 | 4,133 | ||||||||
Deferred merchant payable |
16,767 | (1,345 | ) | 1,752 | ||||||||
Taxes payable |
16,852 | 7,073 | 3,244 | |||||||||
Accrued expenses and other liabilities |
23,404 | 17,067 | 82 | |||||||||
Deferred revenue |
8,796 | 11,942 | 6,876 | |||||||||
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Net cash provided by operating activities |
349,523 | 239,066 | 217,882 | |||||||||
Investing activities: |
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Acquisitions, net of cash acquired |
(34,819 | ) | (3,007 | ) | (7,894 | ) | ||||||
Capital expenditures, including internal-use software and website development costs |
(55,455 | ) | (29,282 | ) | (21,323 | ) | ||||||
Purchases of marketable securities |
(432,373 | ) | (218,922 | ) | | |||||||
Sales of marketable securities |
174,723 | | | |||||||||
Maturities of marketable securities |
150,780 | | 20,090 | |||||||||
Distribution to Expedia related to Spin-Off |
| 7,028 | (405,516 | ) | ||||||||
Acquisitions, net of cash acquired, from Expedia |
| | (28,099 | ) | ||||||||
Transfers to Expedia, net |
| | (95,967 | ) | ||||||||
Other, net |
350 | | (153 | ) | ||||||||
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Net cash used in investing activities |
(196,794 | ) | (244,183 | ) | (538,862 | ) | ||||||
Financing activities: |
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Repurchase of common stock |
(145,221 | ) | | | ||||||||
Proceeds from credit facilities |