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TripAdvisor, Inc. (NASDAQ:TRIP)

UBS Best of Americas Conference Call

September 12, 2013 8:30 a.m. ET

Executives

Julie Bradley - Chief Financial Officer

Analysts

Julie Bradley

Thank you very much for that introduction. It’s great to see everybody here today. It’s great to be over in the U.K. and meeting with investors.

I’m obligated to show you the fine print about the Safe Harbor, but we’ll skip right through. So, as Roger mentioned, everyone is back from their summer holiday, so I hope all of you use the site. The presentation will be a lot easier for you if you’re one of our avid members and users, and if you have the opportunity to take those wonderful trips. I’m going to go through the slides fairly quickly, because I do assume most of you know who we are, just so that we have time for questions at the end.

Our main mission is to help travelers around the world plan and take that perfect trip. So there’s a lot of enjoyment in coming to TripAdvisor as you discover new places to go with your family.

First, I’m just going to go quickly through key fun facts about TripAdvisor. We are headquartered right outside Boston in Massachusetts. We have probably about three-quarters of our employees in Massachusetts. We’re about 1,900 employees in total globally. We actually have two offices in the U.K., one in London and one in Oxford.

We’re very global. We’re in 30 different countries, 21 different languages, and what we’re showing and sharing with our travelers are 725,000 hotels and accommodations, 1.3 million restaurants, 300,000 attraction pages.

So this coupled with the valuable content that our user community contribute at a rate of over 70 new pieces of unique contributions every single minute around the globe. And we get that from our sheer scale. Year-to-date, actually in the first half of the year, over 1 billion unique users came to TripAdvisor and interacted with our hotels, restaurants, or attraction pages.

So, a lot of scale. We use that scale to generate very profitable leads to online travel agents and hoteliers and also restaurateurs. And for us, that translates into a lot of money. So, we’ve been growing at a pretty rapid pace, and we have very strong EBITDA margins and growing.

We’re doing this, as I said, 30 countries around the world, and we’ve kind of taken, if you look at this timeline, a more measured approach to internationalize. So, we go into -- we open up new countries, a lot of times we do that through our SEM efforts, try to get trial to the site, new content, new machine , and human translates a lot of our content from our other site and really get the users committed to using TripAdvisor and finding it a valuable resource , and we continue to open our new markets. We see a large opportunity in international going forward.

Something that people don’t always understand about us, is we run about 20 different travel-related sites. So, things like BookingBuddy, Tingo, CruiseWatch, SeatGuru. We just bought Niumba, and I’ll talk a little bit about M&A in the future. So, a lot of times people are interacting with a TripAdvisor site without even knowing it.

So we’re with you every step of the way. We understand that there’s great pleasure in planning and taking that trip. So, we have great discovery tools, we also have great in-market tools to help you execute on that. We’ll talk a little bit about mobile in a minute, and we support you on that trip, and then we hope you come back to our community, add those pieces of content to make it a much richer experience for the fellow TripAdvisor users going forward.

So, our mission is really to be the travel website for every user across every device, and across every country, and the value is the impact from our community. That’s why people come back, that emotional attachment that they have to the community and the tools that we give them to sort the data based on what type of trip they’re taking.

We might say, we have sorted it for you. We do a lot of personalization, but we also allow you to tailor your search. So, you might read a review that says, “Don’t stay here, the pool is filled with children.” Well, if you’re going traveling with your children, that might be a good place for you, and we allow you to self-select those reviews that fit you on that particular trip.

And because, we’re global, we’re looking at inbound and outbound traffic. What do the locals think about that particular restaurant versus what do people from the other side of the globe think about it?

In this scale, as I mentioned before, it really allows us with this highly motivated traveling public to develop leads off to our partners; online travel agents, hoteliers that convert at a high level. So, we’re generating profits to them through our various lines of businesses, our [tech links] business, our display business, and also we have a subscription business listing that allows independent hoteliers to directly list their URL and telephone numbers on our site for an annual fee.

Something you should know about us are some fundamentals, and some of our operating principles or priorities, as it says here. First and foremost, we think about what’s the right thing to do for the consumer, because our community is our most valuable asset, and that’s what guides most of our decisions.

But in order to execute on that, we need very talented staff, so we’re always looking for the best and the brightest around the globe to help us execute on that vision and create technology that’s flexible and fast-paced. We roll out new codes to the live site every single week. And we do so on a testing, measuring basis, where we continually reiterate, we try something, we measure it. If it works, we roll it out to all of you. If it doesn’t, we pull it back.

And we really encourage our employees to take chances and to think about their own user experience and how they can add value to others, and that shows in the products that we’ve developing. Every week, we have a product meeting, our CEO and founder sits in on them. We get ideas from all of our 1,900-plus employees, our partners, our investors sometimes.

So , pick the things you’d like to see on the site, and I can take that into consideration. And of course, that helps us monetize. The more engaged our users are, the better experience we’re offering to our partners and the more money we make.

So next up, I want to talk a little bit about – touch on some initiatives, things that we’re doing this year, and some investments that are ongoing that we believe are really part of our long term vision. So, the first one is meta-experience. So if all of you, hopefully, were using the site last year, in order to figure out what the hotel’s price was, so part of your research -- you like this hotel, is it available, can I afford it. So, we would direct you to a “show prices” button, and we would pop open three windows.

In that scenario, we also got paid three times. But we were yet to find a user, unless maybe they’re an investor who really liked the fact that we were paid three times that liked that experience. And so, we decided about this time last year we should move to this meta-search display, and we should do it immediately on mobile, because pop-ups on mobile just don’t work.

So we rolled, very, very quickly, our talented product and engineering team rolled it out on to mobile inside a few months. And then that was working well. -We got great feedback on the experience, and now we’ve rolled it to desktop and tablet. So this is what you’ll see, inline display, where you get price discovery and availability.

This was a very big initiative, probably one of the largest initiatives that the company has undertaken in quite some time, and And we’re in that transition. So we finished the rollout to 100% at the very beginning of June. And we’re in the process of kind of finding neutrality from the revenue hit. So, if you think about initial rollouts, our users are staying on our pages longer, they’re highly engaged, they’re finishing their research, and they’re able to find their prices without clicking off, so by that time , there’s a reduction in the amount of clicks that we get.

However, now that they’re much further down the purchase path, they convert at a much higher rate. So when they are clicking off to our partners, they’re much more valuable. So what we’ve said about the transition is that the third quarter, this quarter that we’re in, is going to take the hardest hit because this is three months of being in the transition, even though we’re making iterative improvement, but compared to last quarter there was only one full month.

But we’re on that path to revenue neutrality, which means the increase in CPCs will equal the decrease in clicks that we’re sending off to our partners. And we believe that will occur at the end of this year.

We talk about a couple of investment ideas. We love mobile. It’s very powerful, it’s highly engaging. We have a lot of traction there. As you can see in some of these stats, 79 million unique users are coming to our mobile sites.

And we believe it really reinforces the in-market activities. So we’ve rolled out meta-search onto mobile as I said earlier. You can plan, but you can also look for directions, you can find the restaurant that’s near you by hitting the “near me now” button. So it’s very engaging, and we’re seeing a lot of traction with us, and we continue to heavily invest in mobile.

The other area is social. We have a great relationship, and we have for quite some time, with Facebook. We instantly personalize you if you come to TripAdvisor and you have your Facebook tab open, so we can welcome you that way.

We’re also a member of the Facebook [Graphs], so we’re able to surface your friend data. So when you come to the site now, it is tailored for you. We’re going to highlight your friend content, where your friends have been, if they’ve written reviews, and if friends of a friend have written reviews. So if you buy into the wisdom of crowds, you should really buy into the wisdom of friends.

And just recently we’ve rolled that out on social. So in the past, we connected only on desktop, and now it’s out on mobile. So you’re seeing similar content, and it’s a much richer experience.

So, TV. TripAdvisor has never, in the past, done any TV advertising. We’ve really focused our marketing efforts on acquiring traffic through search engines, through SEM, through content syndication, through Facebook, through luggage tags and stickers. But, on the heels of rolling out the meta-search display, which we just feel is a much better user experience, we really want people to come to the site, make sure they understand the value proposition that TripAdvisor has to offer.

So at the beginning of the year, we allocated tens of millions of dollars to TV advertising this year. We rolled out our first ad at the end of June. We’re in kind of a test, retest phase. I don’t know if any of you saw our ad. This is our first ad, but we’ve also been busy creating other ads that are very memorable. It’s important that, with travel being kind of an episodic event, that we want it to stick with you, because you may see an ad and not always be in the travel planning mode. So be on the watch out for some of our new ads.

I’d be remiss to not mention these other investment areas that we’ve had ongoing. I briefly mentioned business listing. We have over 700,000 hotels on the site for an annual subscription. If you look on the far left, the dotted area, we will populate that for them. For a few hundred dollars a year to $10,000 a year, put your URL, your telephone number, and even a special offer. You know, stay two nights, have free breakfast. Just to try to direct consumers to you directly.

Vacation rentals, this is an area that we’ve been growing organically. We’ve also made several acquisitions in that space. With our motivated travel community, we believe this is a great opportunity to give them the best choice. So if you’re going with your family to Orlando for seven days, staying in a vacation rental might be a better option for you than staying in a hotel. We want to make sure that we surface those other choices.

And then in China, we have two properties, two companies in China, daodao.com and also kuxun.com. This is an area that we have been investing in for several years. We run these at a loss, but they’re meaningful assets. We kind of look at it more as an option on the future. The Chinese market is important, and we want to be there when they’re looking to travel outbound. As that market continues to develop, we believe we’re building a very strong asset there.

So we’ve been growing organically. We’ve also been growing through acquisitions. So these are the acquisitions we’ve made to date. I’ll talk just a little bit about these five acquisitions recently. And you’ll see they line up well with the investment priorities that I just went through: social, mobile, talent, and all of these as well. Vacation rentals, international.

So you can read this as we go along, but I want to make sure that we have time for your questions.

Question-and-Answer Session

Unidentified Audience Member

I might just kick off. You talked about meta as being one type of this. Did you ever think about putting your own grouping functionality out on the website longer term?

Julie Bradley

I get that question quite a bit. I think in the meta-search display, we’re showing all prices. So that’s part of our consumer value proposition, to let the consumers know that we’ve scrubbed the universe for you, and we’re giving you a complete set of the prices available, so you can take the best price or the brand that you like to book with the most. I don’t see us ever becoming an OTA, going out there getting our own supply, doing the back end call handling, and presenting one price to the consumer. Because I think it’s fair to them that they’re looking at everything that’s available versus saying, here’s the price that we have.

Unidentified Audience Member

[Unintelligible]

Julie Bradley

Out of the 1,900 employees, we have a large percentage that are engineers. And we have them in various different businesses. So, when I struggle a little bit with the questions, and thinking we have core engineering, we have business listings engineering, we have vacation engineering, and they all kind of report to different heads of engineering. That is our key area of focus, is probably 25% to 30%, if I can do the rough math across all organizations that are core engineers.

But they are also supported by a very robust product team and a brand team, all of which are doing specs and are part of the process. And the other large section of our employees are business listing sales reps that are -- a lot of them are telesales that are calling on hoteliers around the globe finding us those business listings.

Unidentified Audience Member

With the scale that you’ve now got, clearly it’s now open to significant abuse by incumbents that are trying to kill each other in a way or outpromote themselves. So can you talk a little bit about how you actually sort of mitigate that?

Julie Bradley

About the contributions, reviews being fraudulent? We get that question a lot in the U.K. We don’t get it as much elsewhere. But that is something we take very seriously. You know, I think our biggest advantage is that we have scale. So, if you go to a particular property, and there are hundreds of reviews as a hotel you might be able to get a few through, but not enough to impact their popularity index or their rating. So I think that’s line one of defense, that our community is so robust. We have a lot of reviews.

Second, we have a large fraud and integrity team. We have data scientists, forensics, people who came out of banking and other highly regulated industries that are using data to kind of try to figure out without even reading the review if it’s potentially fraudulent.

And the third line of defense is the community. You’ve probably seen on the site, you know, “do you have reason to believe this review is improper or fraudulent.” You guys are all tattletales. And that information comes into the fraud and integrity team, and they analyze it.

And when we do have reason to believe that the review is not valid, we reach out to that hotelier and say, “Hey, this is the data we’ve collected. What do you have to say about it?” A lot of them say, “Oh, so sorry,” and take it down. And ones that fight us and say, “We have great [stats],” we say, well, we’re going to put a red badge on your site that says, “We have reason to believe that this hotelier is manipulating their TripAdvisor reviews.” Who’s going to book a hotel where there’s a big red badge on it? So it’s kind of a self-correcting problem.

Unidentified Audience Member

Could you just talk to the cruise acquisition you made there in terms of obviously the cruise operators have been much [unintelligible] about going more direct and the customers are a lot more loyal. There are less customers, or new customers, first-time cruisers, etc. Can you just explain what you bring to the party, and how you get paid for it?

Julie Bradley

That cruise acquisition was more about the [unintelligible], the top talent. So there was some technology there, but the primary reason we bought that company related to the knowledge of the cruise industry and also top engineers and product people.

Unidentified Audience Member

[Unintelligible]

Julie Bradley

Every acquisition is different, and a different rationale of why we’re acquiring a specific company. We just talked about the cruise industry. There’s others that we’ve done over the last couple of years that relate to people hires. They have a specific knowledge, they might have bought some key technology. Mobile engineers, for example, have a related skill set that will actually accelerate our movement into that space.

Tiny Post was part of that. We ended up getting this great postcard app with it as well, but we bought a very talented team. And these are small acquisitions, and being able to get a team that’s worked well together, that’s used to the technology, that shares a similar DNA, as TripAdvisor, it accelerates us to market versus being a distraction.

Jetsetter was a leading flash sale site. We were already in the flash sale business. We internally developed SniqueAway, great back end systems. We were getting some traction with supply. Jetsetter had a better brand, and they had a tighter relationship with supply. So by acquiring them we sunsetted the SniqueAway brand, transitioned our knowledge, kind of married it together, and gave it that business focus, and it’s doing quite well.

Niumba is a recent acquisition in Spain, in the vacation rentals business. They have a lot of Spanish inventory that our travelers want. But they weren’t monetizing it at the rate that we monetize our vacation rental business. So there was really opportunity to go in there, consolidate that inventory, get good people, good teams, and use or monetization techniques and our [unintelligible] model to propel that business.

Unidentified Audience Member

Of that 30% growth in revenue, can you talk a little bit about what are some main contributors to that?

Julie Bradley

The five-year [unintelligible] annual growth rates? I would say the two main contributors, from a pure scale standpoint, our click space revenue that you see, the lead generation to the OTAs and the hoteliers, that’s about 76% of our total business. There’s been a lot of change that’s going in that business, so we’ve been growing in the low 20s.

But if you look at the top of funnel opportunity, which we call hotel shoppers… So hotel shoppers are travelers coming to the site, looking at a hotel deal page or a hotel detail page, not the restaurants, not the attractions. Those are the ones we say are top of funnel, because they have a chance of monetizing for us. We don’t currently monetize restaurants and attractions.

So if you take last quarter, 41% hotel shopper growth, very large numbers, we have a couple of things that we bridge down to click based revenue, growth in the low, low 20s, and that would be mobile does not currently monetize at the same rate. And desktop and tablet are pretty much on par. And the other one is international. So we have about 75% of our traffic that comes from outside the U.S. and about 50% of our revenue comes from outside the U.S.

So we do not monetize international traffic at the same rate, and some of that is the evolution of online booking. We can be in countries where they look at us as a research tool, but then take their cash, go around the corner, and book at the travel agent that they’ve used for years. But we think it’s important to be there, because they will evolve. They’ll get to electronic payments. They’ll start booking online. And we’ve become their trusted travel partner.

And then the other transition we’re going through is the meta-transition, which is a drag. So that kind of explains the larger segment, but then if I look at our fastest-[growing] segments, they’re business listings and vacation rentals. Relatively small now, but huge potential.

Unidentified Audience Member

I was just curious if you could kind of describe the typical TripAdvisor user. The demographics of your users. Is there any need to focus on maybe more affluent travelers or a lower-cost traveler, or is it pretty evenly spread among the different types of value proposition in travel?

Julie Bradley

I would say from an economic standpoint, it’s pretty much spread evenly. I would say we probably skew more to people that are price-conscious versus “I just always look at the Four Seasons.” About doing the research and finding pure value. In fact, I do get commentary, usually from investors or bankers, that, “How can that be the number one hotel? Shouldn’t it be the Ritz, the [unintelligible], the Four Seasons?” And I say, well, value comes into our popularity index. People look at the value they’re getting, and that tends to show up in the rating.

So I think we probably skew to people that are budget conscious. And of course we skew to people that are booking hotels. So our children are not big TripAdvisor users, because they’re not booking hotels. But eventually they will. And social initiatives and things that we have ongoing in mobile and restaurants, in kind of starting that relationship early, I think will help us as they mature and start booking hotels.

Unidentified Audience Member

[Unintelligible]

Julie Bradley

We do generate a lot of cash. Let me just briefly remind you of our history. Just in December of 2011 we spun out of Expedia. We had, at that time, a couple hundred million dollars of cash, and we took a $400 million note, which we dividended up to our parent, as our purchase price for freedom. And they swept all of our U.S. cash. So day one, we had zero U.S. cash. Everything was trapped overseas.

We generate a lot of cash, and we’ve been adding that to our balance sheet. It kind of gets added almost 50-50 between domestic and international. We currently have a share repurchase plan in place. We authorized a $250 million stock repurchase plan, and we did that about a year after we spun out of Expedia, once we had built up those cash balances. Because we could only use U.S. cash to repurchase shares.

The primary reason for the share repurchase is to offset employee equity dilution. So that’s what we’ve been doing over the last several quarters.

Unidentified Audience Member

[Unintelligible]

Julie Bradley

I think it should align closely. It excludes stock based compensation, if you’re looking more at a non-GAAP number. And so even if you tax-affected EBITDA, it would probably be a better run rate for cash flow from operations.

From cash flow from operations, I think that math works. I think we will continue to be acquisitive. That’s something that has worked well with us. We’re very focused on it, because we believe we have this great opportunity to grow organically, and where we can accelerate that through M&A, we want to make sure that we have the buyer power to do that.

Unidentified Audience Member

You mentioned two sites you’ve got in China. Can you talk about the Chinese opportunity [unintelligible]?

Julie Bradley

In China we have two sites, daodao.com, which is like the TripAdvisor.com of [unintelligible], which was organically developed. And we also have kuxun.com, which we acquired, which is more of a meta-site primarily focused on flight and rail.

We aren’t sure which way the Chinese market is going to go. We see that these are two good bets on that future. We understand there’s a much longer horizon in the Chinese market than we do in opening up some of our other international markets. It’s tougher to get traction, and to utilize some of our techniques in opening up new markets has worked well for us in the past.

For example, one of the ways we open up new markets is through SEM. So we buy traffic, even at a loss, to get trial to the site, to get content, to get the users engaged. We get local content, that increases us in the organic search, so we start to get more organic in domain-directed traffic. And that kind of starts our cycle.

In China, there are several pages of paid search, so getting meaningfully up organically is difficult. So we’ve tried other social techniques and other ways to get traction in that business. We also think that the business of the country, there’s more outbound travel, and that’s our real competitive advantage. There’s local players that are focused on in-country travel, but when it comes to a complete universe of what’s available in hotels and restaurants, that’s our unique value proposition to the Chinese community.

Unidentified Audience Member

How much do you invest in [unintelligible]?

Julie Bradley

We do not break that out. But I will tell you that I feel comfortable, based on what we paid for kuxun.com and the net investment, the losses over the last several years, the assets that we have created in China are worth a lot more than that.

Unidentified Speaker

Julie, thanks very much.

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