TripAdvisor (NASDAQ:TRIP), the world's largest travel review company, has historically seen robust revenue growth at its subscription, transaction and other (STO) division. The company earned $29 million as STO revenues in 2010, and the figure grew at a compounded annual rate of about 65% to $130 million in 2013. This compares with contemporaneous growth of 25% in the company's top-line. Improved sales productivity and pricing for the company's Business Listings product, and increased brand awareness, inventory and transactions for the company's Vacation Rentals product, were the key drivers behind the out-performance of the division. 
STO contributes slightly less than 15% to total company revenues and accounts for 14% of our $83 valuation for TripAdvisor's stock. We expect the division to continue growing strongly on the back of sales efficiency, a rapidly expanding user base, the launch of TripConnect for small and independent hotels, and the introduction of a new commission model for vacation rentals. In this article, we discuss the different revenue sources for TripAdvisor STO and the drivers for its future growth.
Different Sources Of Revenue For STO Business
The revenue generated by TripAdvisor from Business Listings and Vacation Rentals is recognized as subscription revenue. The Business Listings service allows hotels, B&Bs and other specialty lodging properties to register themselves on TripAdvisor branded websites, as well as to post special offers for travelers. The Vacation Rentals service, in turn, allows the listing of vacation properties on TripAdvisor's vacation rental sites such as FlipKey, Holiday Lettings and Niumba. Transaction revenues consist of revenues from bookings of hotel rooms on TripAdvisor's transactional sites, Jetsetter and Tingo. And other revenue comprises of content licensing revenues from third-party sites. 
Key Factors That Will Fuel Future Growth In STO
1. The Rapidly Growing User Base To Help In Closing The Gap Between Listed Businesses And Reviewed Hotels: Although the number of Business Listings subscribers has grown by more than 50% annually since 2010 to reach 69,000 in 2013, it is still only about 9% of the total hotel listings for reviews (775,000 hotels and accommodations) on TripAdvisor's sites.  This presents a huge opportunity for the company to grow its Business Listings subscriber base.
We expect the number of business listings to continue growing at high double-digit rates, at least in the near term, since TripAdvisor is increasingly gaining preference among travelers as a travel review website. The total number of monthly unique visitors to TripAdvisor's sites grew by over 50% in 2013 to 260 million, and we estimate that the figure will surpass 750 million by the end of our review period. Hotels are likely to gain more visibility among these users if they subscribe to Business Listings.
2. Launch Of Tripconnect To Help Add More Listings: Last year in October, TripAdvisor launched the TripConnect platform that allows small and independent hotels to participate in meta-display. The option to participate in meta was previously available only to large hotel chains, and online travel agencies such as Priceline (NASDAQ:PCLN) and Expedia (NASDAQ:EXPE). TripConnect offers property owners the chance to bypass OTAs and generate bookings through their own website.
A total of 210 Internet Booking Engines (IBE) covering 135,000 properties worldwide had signed up for TripConnect before its launch, better than the company's expectations.  We expect more sign ups in the future since TripConnect helps property owners to save time on marketing efforts, to reduce commissions paid to OTAs, and to better understand guests' perception about their property through post-stay reviews. A hotel needs to be a Business Listings subscriber with TripAdvisor in order to participate in TripConnect and therefore, we also expect the number of Business Listings subscribers to increase going forward. The growth will likely accelerate from 2015 since TripAdvisor has prioritized TripConnect for that year. To learn more about the benefits of TripConnect, read our article: TripConnect to Give Small & Independent Hotels A Chance To Compete With Larger Players.
3. New Free-to-list Commission Model Will Attract More Vacation Rental Properties: Under the subscription-based model, vacation rental properties pay a flat listing fee to TripAdvisor for a particular time period. The new free-to-list transaction-based model for vacation renting, introduced by the company in the first quarter of 2013, allows for free listing of vacation properties. Instead, property owners pay TripAdvisor when a customer makes a booking for the property. This has enhanced the property owner's experience by reducing the friction to list properties. The free-to-list model also allows TripAdvisor to list those properties at the top which have higher conversion rates, thus providing the best recommendation to the traveler.
TripAdvisor catered to 300,000 vacation rental properties until 2012. The new model helped the company to add another 250,000 properties last year.  We expect a greater number of property owners and managers to be enticed by the new offering, allowing the company to build a formidable inventory base in the fast growing, highly fragmented online vacation rentals market in the U.S. According to a study by PhoCusWright, the U.S. market for vacation renting stood at $23 billion in 2012. Online sales accounted for about 24% of the bookings in that year, and the percentage is expected to increase to 30% in this year. 
- TripAdvisor's CEO Discusses Q4 2013 Results - Earnings Call Transcript, Seeking Alpha, February 11, 2014
- TripAdvisor Form 10-K, SEC Website, 2013
- Hundreds of booking engines on board for TripAdvisor service in anticipation of launch, TripAdvisor Press Release, August 1, 2013
- The Rise of U.S. Online Vacation Rentals, PhoCusWright, October 23, 2013
Disclosure: No positions