TripAdvisor (NASDAQ:TRIP), the world's largest travel review company, posted revenues of $281 million in the first quarter of fiscal year 2014. Click-based advertising revenue increased by 16% year-on-year and accounted for 74% of total revenues. The business benefited as TripAdvisor's meta-display platform witnessed an increase in pricing and conversion rates. We will talk about meta in detail in this article. 
Adjusted EBITDA growth also accelerated to 135% sequentially as total expenses decreased to 57% of revenue from 75%, primarily due to the timing of TripAdvisor's TV advertisements. The company began investing into new TV campaigns recently and therefore it expects to incur the bulk of its selling and marketing expenses for the year in Q2 and Q3.
Citing the positive developments that occurred in the first quarter, TripAdvisor raised its guidance for top-line growth for the year from mid-20s to high 20s to low 30s. However, the forecast does not incorporate any meaningful upside from future increases in pricing and conversion rates. It also does not include the effect that its new ad campaigns will have on the traffic. This means that revenues could increase beyond the management's expectations.
We are in the process of updating our $83 price estimate for TripAdvisor, based on the quarterly results that were recently announced.
Pricing and Conversion Improvement On Meta-Search Is Encouraging
Earlier, TripAdvisor's users had to click through to an advertiser's website in order to view hotel pricing and availability information. The meta platform allows users to do all the comparison-based shopping on TripAdvisor's website itself since it collates and displays this information from top advertisers. Although this has lowered the number of leads sent by TripAdvisor to its advertisers, the leads are more qualified and have better conversion rates, as travelers are now more likely to click on the advertiser's link for booking rather than just seeking information.
The better quality leads allowed TripAdvisor to increase its advertising rates. Despite this, the meta platform was unable to achieve revenue neutrality until Q3, as fewer leads were being sent to advertisers than before. Advertisers were wary of the transition to meta-display, and therefore, were conservative when bidding on the new platform. The feature approached revenue neutrality in December last year through a combination of higher ad pricing and better conversion rates. Pricing improved through Q1 2014 as competition among advertisers to gain visibility in the meta platform lifted bids, while conversion rates improved as more users returned to make purchases.
The increase in prices and conversion rates helped accelerate revenue per hotel shopper growth from -19% and -9% in Q3 and Q4 2013 respectively to +1% in Q1 2014.  We expect further acceleration as the meta platform grows in scale.
Direct Bookings Launched On Apps And Mobile Websites
Using TripAdvisor's app was cumbersome for users until October last year, as they had to click on advertisers' links to see details and complete the booking process. The company launched native apps for Android and iOS devices to reduce this friction. The re-launched apps allowed in-app navigation by keeping the booking experience restricted within TripAdvisor's app instead of launching new advertiser windows in a mobile browser. 
Although this enhanced the interface, users continued to struggle when they wanted to move back and forth between advertisers' and TripAdvisor's content. The problem was more prominent in smartphones than other devices due to the smaller size of the screen. Therefore, the company began taking direct bookings on its Android and iOS apps and its mobile site, this quarter. This new feature is called Instant Booking. It enhances the user's experience by completing the booking process on TripAdvisor itself. It handles all aspects of the booking process from selecting a room to inputting the personal and credit details, thus offering a frictionless booking experience. 
Instant booking is currently only available to 10% of the U.S. traffic. It is expected to reach 100% of the smartphone users in TripAdvisor's most important markets by the end of this quarter. The company is designing similar versions for desktops and tablets. We think that Instant Booking will help the company to improve smartphone monetization levels. According to the latest data available, TripAdvisor's smartphone monetization is less than 20% of that on desktops even though mobile traffic accounts for 47% of total traffic and is growing much faster than desktop traffic.
Disclosure: No positions.