Google execs are not losing any sleep yet, but they are likely aware that some of their largest travel advertisers are starting to favor commercials on TV instead of sponsored search engine links. The big spenders' new strategies will have a rippling impact across other metasearch companies, as well.
TripAdvisor kicked off a new strategy in the second half of 2017, emphasizing TV advertising and reducing online marketing spend in areas where it wasn’t profitable.
The impact is that this put pressure on top-line growth, but is geared to bolster profitability, or at least to slow the decline in earnings before interest, taxes, depreciation and amortization, TripAdvisor Chief Financial Officer Ernst Teunissen told analysts Thursday after the release of the company’s fourth-quarter financial results a day earlier.
TripAdvisor plans to lean in on brand-building in the form of increased TV advertising, including in new markets, in 2018. The company will build on the $74 million it spent on TV last year, which began in the second half of 2017, and will nearly double that commitment. Online marketing, or performance marketing, on channels such as Google will be reduced this year, the company said.
“In our Hotel segment, we will continue to reduce performance marketing expenses to achieve higher return on investment from online marketing channels,” TripAdvisor stated in prepared remarks. “At the same time, we expect to increase our brand advertising investment to $100-$130 million. The net result will be lower Hotel selling and marketing expenses compared to 2017.”
As a result, however, TripAdvisor expects its hotel revenue to decline in 2018. And the hope is that the company’s new strategy will lead to a less-severe drop in earnings this year.
Online travel companies, hotels, and airlines nearly always strive to make their marketing spend more efficient, so this isn’t particularly new. For example, several years ago Delta stopped advertising with a couple of dozen metasearch and online travel agency companies because the airline wasn’t getting sufficient bang for its bucks.
Teunissen said TripAdvisor is getting better at at evaluating the efficiency — or lack thereof — of its online spend. He said enhanced attribution of downstream traffic and more sophisticated models help the efficiency effort.
In some ways, TripAdvisor’s refined marketing strategy parallels what the Priceline Group has been doing since last year. CEO Glenn Fogel of Priceline said late 2017 that the company would emphasize TV advertising and take a step back in spending marketing money in less-than efficient online channels. Expedia’s Trivago, in particular, felt an adverse impact, and TripAdvisor may have felt the pullback, too.
Relations With Expedia and Priceline
When asked during the conference call to explain relations with the company’s two largest advertisers, namely Expedia and the Priceline Group, TripAdvisor CEO Steve Kaufer characterized ties as “excellent,” but he added this is “notwithstanding” the desire of some companies to change their marketing mix.
In other words, just as TripAdvisor will rely more on TV advertising in 2018, it is possible that Expedia and the Priceline Group may likewise decide to reduce their marketing spend in TripAdvisor. However, these sorts of things may change month to month, or even day to day.
Hotel Performance is Unsatisfactory
In TripAdvisor’s prepared remarks, the company characterized its hotel performance as sub-par.
“Hotel segment adjusted EBITDA declines over the past couple of years have been unsatisfactory,” the company said. “However we are encouraged by our recent progress. In 2018, we will continue to enhance our product and position our marketing investment mix for optimal benefit.”
As the company conceded, TripAdvisor’s hotel business is struggling, although its non-hotel segment, including restaurants, attractions, and vacation rentals, grew revenue 20 percent to $77 million in the fourth quarter. The non-hotel segment is less than one-third the size of TripAdvisor’s hotel business, which saw revenue fall 3 percent to $244 million.
For the fourth quarter, TripAdvisor’s net loss was $84 million compared with $1 million in net income a year earlier. Total revenue increased 2 percent to $321 million.
In terms of its outlook, TripAdvisor expects flat adjusted earnings in 2018. A reduction in marketing spend in its core hotel business — in favor of marketing efficiencies — would mean lower hotel revenue in 2018 and a smaller profit decline, according to the company’s forecast.
What Do the Financials Mean?
For the fourth quarter, investors were interested in a relative comparison of TripAdvisor to peers after Trivago and Expedia set a low bar with their reports, said Seth Borko, senior research analyst at Skift Research.
“Overall, the fourth quarter of 2017 and guidance for 2018 was better than many investors had feared,” Borko said. “TripAdvisor exceeded Wall Street estimates for Q4 2017 EBITDA (earnings before interest, taxes, depreciation and amortization). The upside was driven by a combination of better Hotel segment revenue, $244 million versus expectations of $231 million, and lower marketing expenses. TripAdvisor only spent $167 million on selling and marketing, or 52 percent of revenue in the fourth quarter, versus expectations of $172 million, or 56 percent of revenue.”
TripAdvisor’s management team also gave a rosier outlook for 2018 than many had expected, Borko said.
“Sure, they admitted that Hotel revenue would be lower next year, but most investors already knew that,” he added. “Instead the optimism comes from a growing tours and restaurants business and lower marketing expenses.”
Photo credit: TripAdvisor hopes its more efficient marketing spend and TV push will increase profits. Pictured is a still from a recent TripAdvisor TV commercial. TripAdvisor