Will Lyons - TripAdvisor, Inc. Stephen Kaufer - TripAdvisor, Inc. Ernst J. Teunissen - TripAdvisor, Inc..

Lloyd Walmsley - Deutsche Bank Securities, Inc. Kevin Kopelman - Cowen and Company, LLC Deepak Mathivanan - Barclays Capital, Inc. Naved Khan - SunTrust Robinson Humphrey, Inc. Mark A. May - Citigroup Global Markets, Inc. Michael J. Olson - Piper Jaffray & Co. Justin T. Patterson - Raymond James & Associates, Inc. Jed Kelly - Oppenheimer & Co., Inc.

Nathaniel Schindler - Bank of America Merrill Lynch Paul Bieber - Credit Suisse Securities (USA) LLC Brian P. Fitzgerald - Jefferies LLC.

Good day, ladies and gentlemen, and welcome to TripAdvisor's Third Quarter 2017 Earnings Conference Call. As a reminder, today's conference call is being recorded. At this time, I would like to turn the conference call over to TripAdvisor's Vice President of Investor Relations, Mr. Will Lyons. Please go ahead..

Thanks, Sonia. Good morning, everyone, and welcome to our third quarter earnings conference call. Joining me today are Steve Kaufer, our CEO; and Ernst Teunissen, our CFO.

Last night, after market close, we distributed and filed our Q3 earnings release, we filed our 10-Q, and we made available our prepared remarks on our Investor Relations website located at ir.tripadvisor.com.

In the release, you will find reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures discussed on this call. You'll also find supplemental financial information, which includes certain non-GAAP financial measures discussed on this call, as well as other performance metrics.

Before we begin, I'd like to remind you that this call may contain estimates and other forward-looking statements that represent the company's view as of today, November 7, 2017. TripAdvisor disclaims any obligation to update these statements to reflect future events or circumstances.

Please refer to our earnings release and our filings with the SEC for information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements. And with that, I'll pass the call over Steve..

Thank you, Will. Good morning, everyone, and thank you for joining our call. As we discussed in our prepared remarks last night, we continued to make progress on our long-term growth initiatives aimed at building more durable direct relationships with hotel shoppers on our platform.

Reallocating marketing dollars to brand building channels has contributed to softer topline results, but we believe this is the best path towards driving profitable revenue growth over the long-term. In Non-Hotels, strong momentum continues, particularly in Attractions and Restaurants, products that deepen traveler engagement with our platform.

We are investing to further broaden our marketplace, to grow bookable supply, and to improve the product experience, helping more travelers throughout more moments of every trip. In both segments, we have a lot more work to do, but we play the long game and remain focused on building for the long-term.

Ernst?.

Thanks, Steve, and good morning, everyone. Reigniting our near-term hotel revenue growth has proven more challenging than we expected this quarter and this year. But our product and marketing initiatives continue to deliver early positive signs, and we are optimizing our marketing mix for maximum long-term benefit.

Our television advertising investment was the primary driver of Q3 operating expense growth year-over-year. The prudent expense management, as well as continued strength in our Non-Hotel segment, has enabled us to maintain our 2017 adjusted EBITDA expectations.

Across our business, we will continue to strike an appropriate balance between growth and profitability as we aim for long-term shareholder value creation. With that, we'll open it up for your questions..

Thank you. Our first question comes from Lloyd Walmsley of Deutsche Bank. Your line is now open..

Thanks for taking the question. Two, if I can. First, in the prepared remarks, you guys had said hotel shopper growth is flattish in October. So, just wondering, if mobile continued to hover around say the mid-20%s range, it would imply desktop shopper growth falling double-digits into October.

Is that the right way to think about it? And then second one. On the Non-Hotel side, can you give us some color on the cost structure to the business here, relative maybe to the core business? Is it more advertising intensive, historically? And we ask because obviously you're seeing a nice margin expansion.

Some of it's driven by declining OpEx year-over-year, so trying to get a sense for what the cost structure looks like, where it may have bottomed out, such that future EBITDA will be more driven by topline growth on that side? Thanks..

Hi, Lloyd. Good morning. The mobile question, yes, we did see deceleration. Actually, throughout Q3 and in October, we saw flattish overall shopper growth. It is a continuation of relative out-performance of mobile shopper growth and under-performance of desktop shopper growth. So that's a trend that continues and is underlying that overall trend.

In terms of your second question, and sort of cost structure between Hotel and Non-Hotel. So, what we see is that the cost structure is quite comparable in terms of the line items of sales and marketing, tech and content, and general and admin, in terms of structure of the P&L, so not that much different.

What we've seen this year is skill benefits in the Non-Hotel business. We're growing.

We're particularly growing faster on our TripAdvisor platforms for Attractions, for instance, but also for Vacation Rentals, which has allowed us to be more efficient with our marketing spend this year compared to other years, and it's overall scale benefits actually that is driving most of the margin expansion in that segment this year..

Okay. Thank you..

Thank you. Our next question comes from Kevin Kopelman of Cowen and Company. Your line is now open..

Oh, hey, thanks, and good morning. Can you give us – you gave a lot of really good color on the click-based and transaction-based revenue. Can you give us more color on what Q4 or the full-year is looking like for Non-Hotel and perhaps some of the other hotel lines to get to that full-year new revenue guidance for low single-digits growth? Thanks..

Yes, hi, Kevin. The other lines see a continuation of trends more or less. The Non-Hotel sees into Q4 very similar growth trends as we've seen throughout the year. Early in the year, we said we would expect similar growth in 2017 as we did in 2016. That still holds. So not much movement in other lines from Q3, Q4 in terms of relative growth rate.

It's really the click-based and transaction that's the big difference..

Okay. Thanks. And then just one follow-up on that. It looks like very easy comp in – I think other hotel revenue.

Is that, in fact, an easy comp, or what does that look like?.

Yeah. So, we've seen in the other hotel revenue, we've seen deceleration, negative growth rates in the first half. We're happy to see that turnaround in Q3 again. And the trend into Q4 will be – is likely not to be too dissimilar from Q3..

Okay. Thanks. And then just one final big picture question.

As you plan for 2018, how are you – what are you balancing as you figure out what an appropriate level of growth and profit is? And how should we be thinking about it?.

Yes, as we think about 2018, clearly on the topline side, as we highlighted in our prepared remarks, we'll enter 2018 with the headwinds that we've seen on the topline in our core auction that we have described. So that will be a headwind moving into the new year.

We continue to think about our marketing budget as an increase of TV spend, but a gradual increase of TV spend is next year, but a reallocation of less efficient paid marketing spend as well. So over and over, we're going to balance the two aspects of our marketing mix.

And then overall, we'll take a very prudent look at our other expenses as well in the Hotel segment. In Non-Hotel, we expect continued progress both on top and bottom and we'll continue to grow that business as we have over the last quarters and years..

Thanks, Ernst..

Thank you. Our next question comes from Deepak Mathivanan of Barclays. Your line is now open..

Hey, guys. Thanks for taking the question. Two questions for me. So first, mobile monetization continues to improve well. I think it's up 12% this quarter, while desktop is why there's been a sharp decline.

Can you elaborate the trends that's driving mobile versus desktop monetization, particularly considering the partner spend adjustments? And then second one, just to elaborate a little bit – maybe you can elaborate a little bit on marketing budget. You noted that you pulled back from certain less efficient channels.

How should we think about the scope of that going forward in 2018? Perhaps you can maybe call out what specific channels those are as well. Thanks a lot..

Yes, hi Deepak. To start with the mobile monetization, indeed, again year-on-year, RPS growth on mobile monetization – the partner bid-downs did have impact on mobile as well, but we were still able to grow revenue per shopper year-over-year. And the cause of that is the continued focus from our product teams on mobile and mobile monetization.

It's been a big push for us in parallel to all the other initiatives that we ever had gone on. Particularly on mobile web, we've seen very impressive wins. As you know, in Q2, we kicked off a new site experience, which was across desktop and mobile, and we're happy to have seen very nice wins on the mobile side.

On the marketing budget and how we have seen it evolved, can you restate the question? I don't have the full question..

Yeah, sure. I was trying to figure out what channels you have pulled back and how should we think about the scope of the program going forward in 2018. I know you called out certain less efficient channels.

I was wondering if it's SEM-related or re-targeting or a combination of both?.

Yes, thank you. Thanks for specifying. It's across a number of different channels, so it's not a specific channel that we've identified. We've become a little bit more sophisticated in the attribution of our different channels to the downstream booking.

We have, as you know, managed a whole portfolio of performance-based marketing more or less to breakeven, but if you dig deeper, there are some less efficient spend across multiple channels. And so we've been pulling back on that versus what we had planned initially in the year, which is a further impact on our revenue growth.

We do believe there is more scope for efficiency optimization in our paid marketing. We continue to do that, we are continuing doing that in Q4, and going into the next year, we do see further scope for more efficiency on the performance-based channel..

Great. Thanks, Ernst..

Thank you. Our next question comes from Naved Khan of SunTrust Robinson Humphrey. Your line is now open..

Yeah. Thank you very much. I had a couple of questions. Just wanted to clarify this, but the fact that you pulled back on some of the performance ad channels. Is that having a more pronounced effect on desktop traffic versus mobile? And then I had a follow-up..

Yes, hi, Naved. Good morning. It indeed has had a disproportionate effect on desktop. Our ability to spend on performance-based marketing is a direct function of the revenue per shopper that we can achieve. And as we discussed, we saw pressure on revenue per shopper in desktop, but we were able to increase revenue per shopper on mobile.

So the relative impact has been more significant on desktop..

Okay. And then just on the – can you just comment on the dynamics between the fact that your partners might be looking for higher ROI or they might have moved their ROI targets when they advertise with you.

And at the same time, you are able to improve some of the monetization on mobile hotel shopper? What's the interplay between the two in terms of when advertisers are bidding, with different targets, and when you're also solving for increasing monetization?.

Yeah, being able to improve monetization is of course a plus. It allows us to lean into paid marketing, be more competitive either on Google or with re-targeting. And so, despite partner bid-downs, our improvements there allow us to expand marketing spend on mobile..

Thank you..

Thank you. Our next question comes from Mark May of Citi. Your line is now open..

Thank you.

In terms of – sorry if these have been addressed already, but in terms of the advertiser bid-downs, are there any signs of source (14:28) stability there, or are there potential for those to keep adjusting? And then will the decrease in revenue per shopper in any way impact your thinking about your marketing plans and increase in marketing spend, including TV going forward? Thanks..

Hi, Mark, good morning. This is Steve. With regard to the bid-downs, we've run this auction for so many years. There's always a fair amount of volatility month-to-month or quarter-to-quarter.

In this particular case, I think you've seen some of our partners' comments on increasing marketing efficiencies, and they don't seem to be publicly commenting on an ever-declining direction; but rather, they've tightened their efficiency to afford to do some other things, which, presumably, makes sense for their business model.

So, as we have always done, we take into account the new landscape, and we forecast our future plans based upon a status quo of the current bid levels..

To your second question, Mark, revenue per shopper and the impacts on marketing, broadly defined – so a few things I'd like to highlight. So, our revenue per shopper year-on-year was negative 11%. We bid separately for traffic on desktop and on mobile. The total was down 11%. Mobile RPS was up. Desktop was down, but actually less down than the 11%.

So, the 11% is, to a significant degree, also driven by the mix shift between the lower monetizing mobile traffic. So, in the meantime, we are improving our product quite significantly.

One of the things that we called out is that, if we look at, in the quarter, the year-on-year performance of just the economic value the underlying leads bring that we provide to our partners, that has been improving. So, the decline that we've seen on desktop revenue per shopper has been largely driven by these partner bid-downs.

So, while these partner bid-downs have happened, we've also made significant strides in positive development. And as we think about our marketing budget, the performance-based marketing budget; and to some extent, the TV budget as well, as we look at ROAS, ROAS is going to be impacted by our projections for revenue per shopper.

And our projections for revenue per shopper are a function of what we expect the external environment does, obviously how our partners behave, but also what we believe we can improve over time, in terms of the underlying economic value of our shoppers..

Thank you..

Thank you. Our next question comes from Mike Olson of Piper Jaffray. Your line is now open..

Hey, good morning. I have a fairly high-level questions. I think parts of this really have been asked already in different ways.

And it may be hard for you to say, but what do you think changed in how your major advertising partners are thinking about the metasearch channel as a source of traffic? Did the ROI or conversion of the traffic that meta provides worsen, or is that their ROI thresholds are higher than they were in the past? And then, other than meta-channel sources finding ways to deliver higher converting traffic, what could alter that trend? Thanks..

Sure, Mike. Thanks. This is Steve. I would not kind of lump all of our partners into the ones that are currently looking for a higher ROI. And the partners that I have had the chance to speak to are all quite appreciative and interested in buying more and more traffic on the part of TripAdvisor.

So, I think we are an excellent partner for our hotel in OTA clients. We provide a very flexible bid mechanism. A flexible downstream kind of conversion funnel for them. And when we are able to measure the quality of the clicks that we send down to our partners, they have become more effective.

In other words, they convert better than they did before, and that's direct work on our side to better qualify the traveler to be ready to book this hotel before we send them downstream to a hotel or an OTA. So, we're kind of doing all the things that we can on our side to make ourselves a better partner.

And I don't detect any reluctance on the part of partner hotels or OTAs to invest in the meta-channel in general.

And so, again, you should of course be asking them, but when it comes to the overall health of meta as a channel, it still serves a very important function for travelers, and OTAs and hotels still recognize that it's a very important channel for them to tap into the type of demand that we bring to the table..

Thank you..

Thank you. Our next question comes from Justin Patterson of Raymond James. Your line is now open..

Great. Thank you very much.

In the prepared remarks, you mentioned that Hotel segment expenses were effectively flat, ex-TV advertising? How do you think about the trade-off between revenue growth and profitability? Do you worry that you're under-investing in tech and content and perhaps slowing the rate of innovation? And then, secondly, on Vacation Rentals.

The OTAs are stepping up their investment, and Airbnb continues to execute well. How does that shape your strategy in the segment going forward? Why not apply a meta-model to Vacation Rental, and potentially capture some of that advertising budget of the OTAs and Airbnb? Thanks..

Hey, Justin. This is Ernst. Indeed, year-on-year in the third quarter, our expenses in Hotel were flat, other than for the additional TV expenditure. We're striking a balance between, on the one hand, investing enough for growth. But on the other hand, adjust to the headwinds that we are encountering.

So, we're actively striking that balance between revenue growth and EBITDA. We don't believe we are under-investing in tech and content.

If you look at what we've been doing over the last year, we've made some substantial investments in the product, both on desktop and on mobile, to get ready for our brand campaign, and our focus on price comparison as a key value proposition for our users, and on mobile just to make sure that we keep improving that monetization.

So, we believe we have an appropriate level of investment there, and we're balancing future expense growth against our bottom line objectives as well..

This is Steve. I'll take the second question on Vacation Rentals. So, from our perspective, we're really aiming to make sure that that alternative lodging category is well represented on TripAdvisor. So, we have about 800,000 properties. That's a pretty darn good mix. Having said that, of course, we're open to change as well.

We'd love to have even more than that, and more different types available globally. To the question of, why not a meta? I'm not sure that consumers are looking for the price comparison feature within a particular property, more than the ability to find the widest range of properties.

And that's why we do continue to grow our supply, while making sure everything that's on our site is of high quality. So, again, I think it's fair to say that it's important for our travelers. It doesn't have to be, and we're making no claims that we will become bigger than some of the other guys.

But it does aid, clearly, our travelers' desire to have that alternative lodging choice on our site..

Got it. Thank you, Ernst. Thank you, Steve..

Thank you. Our next question comes from Jed Kelly of Oppenheimer. Your line is now open..

Great. Thanks for taking my question.

Can you talk to some of the engagement trends that you believe are benefiting from television advertising, in terms of customer data, such as store credit cards or the hotel shopper trends?.

Sure. This is Steve. I mean, the best things we see from the TV ad relate to how many people are searching for TripAdvisor. When they come to TripAdvisor, how we see their behavior being more what we're looking for than kind of our on-average customer.

So, when they come and they've seen the TV ad, they're more likely to book, they're more likely to sort of go through the hotel shopping experience and actually consummate the transaction, either on TripAdvisor or downstream on our clients' sites.

So, the goal, to remind folks about the TV, was really to present TripAdvisor as a place where not only can you read reviews, but you can do your price-comparison research, and understand how TripAdvisor can save you money.

Not, to the specific of your question, to help us generate more instant bookings whereby we might be able to have a credit card, but to really change the perception.

So, I couldn't honestly tell you right now whether we are generating more saved credit cards or something like that from the TV campaign, because that really wasn't the target of our branding exercise..

Thank you..

Thank you. Our next question comes from Nat Schindler of Bank of America Merrill Lynch. Your line is now open..

Yeah, hi. You obviously have two large OTA partners who are your principal revenue source in the click-based revenue business. And from the discussion with you, and then discussion with a competitor, it's pretty clear that one of them has changed their philosophy on ROI.

How does that affect the other?.

Sure. This is Steve, Nat. We run an auction. There's two big players up there. With the two big players, of course, there are several brands to compete there. When any one player bids down, by mathematical definition, share shifts to the other players in the auction. I can't be telling you anything you don't know..

Not just, though, on share.

How does it affect their behavior? Are they lowering their bids? Do they follow bids lower or do they just simply get more share at the same bid?.

You'd have to look kind of market-by-market. What I'm trying to say – when a single player changes their bids, it's in aggregate. So, it's somewhat difficult for another partner to know exactly what they can and cannot do in response. So, you should think of it as share shift, yes.

But I wouldn't think of necessarily a big corresponding change on the part of the other client..

And just one other clarification, you mentioned that it's individual brands within these companies.

Is the partner that has changed their ROI philosophy – are they doing it across all their brands, at the corporate level, or are they doing it on a specific brand in a specific region?.

Yeah, I appreciate the question, but we really aren't able to talk about specific brands in our discussions..

Okay. Thank you..

Thank you. Our next question comes from Paul Bieber of Credit Suisse. Your line is now open..

Good morning. Thank you for taking my question. I was hoping you could help us size the components of the Non-Hotel business. Obviously, there's Vacation Rental, Restaurants and Attractions in there.

Can you just give us some context for the relative side of those businesses and growth rates?.

Yes, in terms of growth rates, clearly, the faster growers are Attractions and Restaurants. So, in terms of growth, they're driving the growth in the segment.

In terms of relative sizes, I don't want to be too specific in breaking it out, because we haven't broken it out, but Attractions is the largest of the three components with the other two smaller. But that's the order of magnitude, but I'm not going to go in more detail in breaking out as a percentage..

Okay. Thank you..

Thank you. Our next question comes from Brian Fitzgerald of Jefferies. Your line is now open..

Thanks, guys. We want to know what type of dynamic if there's anything notable to call out with respect to conversion from Non-Hotel from Hotel.

Are you seeing any uplift or tailwinds in the Non-Hotel area where branded campaigns are running? And then a follow-up on Non-Hotel type of inventory, how do you feel about the breadth and depth of what you have there, your offering there, and then the rate at which you're adding more inventory, if you will, there?.

Thanks, Brian. This is Steve. The TV campaign is very much focused around educating folks on price comparison around hotels. Looking at a conversion lift in the Non-Hotel category from the additional brand awareness, next to impossible for us to tell, in part because those components on TripAdvisor are growing so strong all by themselves.

So, you just have a lot of goodness happening in that Attraction, Restaurant category. In terms of Non-Hotel inventory trends, we continue to grow both on Restaurants and Attractions in particular. And Attractions, the bookable products up 30-plus percent year-on-year. The overall Attractions listing growing as well.

And when you look back a couple of years, the bookable supply is up 5X or something. So the marketplace concept has really worked for us. We continue to grow in all regions of the world, and we love it. It's the classic marketplace model where as we add more to the supply match to the TripAdvisor demand that we already have, it continues to grow.

I think our TripAdvisor-sourced bookings for the Attraction category was up 100% year-on-year in Q3. So, we're just seeing really nice signs of that whole trip lifecycle coming together, and you see that in the numbers in that other hotel business growth. So, Ernst, do you want to add anything? I think we're good there. Thanks..

Thanks, Steve..

Thank you. And I am showing no further question at this time. Now, it's my pleasure to hand the conference back over to Mr. Stephen Kaufer, Chief Executive Officer, for some closing comments or remarks..

All right. Well, thanks, everyone, for joining the call. I want to thank our employees around the globe for their continued hard work, and we look forward to updating everyone next quarter. Thank you very much..

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day..