Tripadvisor Inc (TRIP) 2012 Q2 法說會逐字稿

Today ladies and gentlemen and welcome to TripAdvisor second-quarter 2012 conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions on that time. (Operator Instructions) as a reminder this conference call is being recorded. Now turn the conference over to Captain, senior investor relations. Please begin.

Thanks -- good afternoon and welcome to TripAdvisor 2nd quarter 2012 earnings conference call we appreciate you joining us today. I'm Will Lyons, Senior Director of Investor Relations for TripAdvisor, and joining me on the call today are CEO Steve Kaufer and our CFO Julie Bradley. Before Ebionites remind you that today's presentation contains estimates and other statements that are forward-looking under Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these factors is contained in TripAdvisor's filing with the SEC, including our annual report filed on Form 10-K, which is available on www.sec.gov. The forward-looking statements included in this call represent the Company's views on July 24, 2012. TripAdvisor disclaims any obligation to update these statements to reflect future events or circumstances.

During this call, we will refer to non-GAAP financial measures that are not prepared in accordance with Generally Accepted Accounting Principles, including adjusted EBITDA, adjusted EBITDA margin, non-GAAP operating expenses, non-GAAP net income, non-GAAP net income per diluted share, and free cash flow. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measure is available in the press release announcing our second-quarter 2012 financial results. This press release as well as other important content is available in the Investor Relations section of our website, www.TripAdvisor.com And with that, I'll now turn the call over to Steve.

Thank you, Will, and welcome everyone to today's conference call. The second quarter completed a great first half of 2012 for TripAdvisor. We generated record quarterly revenue of $197 million and adjusted EBITDA of $97 million, continued to grow traffic in hotel shoppers, while taking important steps to optimize traffic quality and continued growing and leveraging our social and mobile initiatives to drive user adoption. We are making tremendous headway on content collection, membership, and traffic. At the end of Q2, we passed the 75 million reviews and opinions milestone and our travel community continues to add content at 50 contributions per minute which translates to an accelerated pace of more than 25 million contributions for 2012. Marketable member growth, travelers whom we have permission to email on a regular basis, also accelerating during the quarter, growing over 25% to more than 32 million up over 60% year-over-year.

At the top of our funnel, total traffic growth also remained strong as Q2 comps core data reflects an average of more than 54 million worldwide unique visitors to our advisor sites, up more than 31% year-over-year. Further down the funnel, hotel shoppers, the key metric for our click base revenue line, was up approximately 30% year-over-year, and would've been higher were it not for a strategy change that I'll discuss in a minute. User engagement on the site was up as well, as we saw growth in time spent per session and page views per session, according to our internal log files. We attribute this growth in user engagement to our robust email campaigns and continued efforts to personalize the site experience.

In social, we are finding great ways to leverage the building blocks we put in place on the Facebook platform. In April, we merged our TripAdvisor and Cities I've Visited apps into one app, better integrating Facebook's users' activities within TripAdvisor, and allowing friends to find TripAdvisor more easily on Facebook. In the first half of the year, TripAdvisor published more than 300 million actions generated from member activity on our website or using our app into Facebook's Open Graph. In June alone we had over 32 million logged in Facebook users use a TripAdvisor app or be instantly personalized on the site. This traffic level makes TripAdvisor the second most popular Facebook app according to app data. These efforts have been very successful in terms of brand awareness, content, and community building, and growing our friend-connected member base.

In addition to social, our mobile initiatives continue to thrive as we continue to invest in, and innovate on this fast-growing platform. During the quarter, we rolled out our iPad app and introduced Facebook log in functionality. We also launched 30 new free City Guides across iOS and Android, bringing our coverage to 50 cities. As of June 30, we reached over 22 million cumulative mobile app downloads of our TripAdvisor, City Guides, and SeatGuru apps on smartphones and tablets up more than 200% year-over-year. We also grew to more than 27 million monthly unique users of TripAdvisor on mobile devices in May. Further, tablet continues to be our fastest grower in terms of mobile page views, sessions, and unique users and accounts for more than 75% of our mobile revenue. We are obviously pleased with our mobile growth and we are focused on creating a more complete user experience on mobile, which will lead to an even more loyal and engaged user community.

One of the more interesting developments this quarter was our traffic quality improvement initiative, which span the quarter and effected all geographies. We leveraged our massive amount of user, click, and traffic conversion data to identify traffic that converted well on TripAdvisor but didn't convert as well on partner sites. In other words, these are visitors who browse the TripAdvisor site, clicked on a paid link to visit one of our clients, but ultimately didn't make a booking. While we get paid for that click, we know we aren't ultimately helping our clients make money. Using this information, we've reduced our SEM spend on lower performing traffic as we believe this will increase the conversion rate for our clients.

Rather than reinvest this cost savings in search marketing, we chose to reallocate some of it towards our traffic diversification efforts, including our marketing campaigns on Facebook. This initiative lowered our hotel shopper growth which translated into lower top line revenue growth, but also drove our improved Q2 EBITDA performance. Absent this strategy change, we would have seen higher Q2 hotel shopper growth, perhaps even accelerating growth from Q1, and revenue could have been approximately $5 million to $10 million higher. This traffic quality improvement strategy is another example of us doing what's right for the business longer-term, even at the expense of near-term growth.

As our site redesign last year helped improve the user experience for our community, this initiative targets improved downstream conversion for our clients. We view this as a new steady state for our business as we strive to optimize and diversify our traffic sources and we can easily increase SEM spend if the opportunity arises. Despite this optimization, it's important to note that we continue to expect revenue growth in the high teens for 2012. However, our strong Q2 adjusted EBITDA margin performance should not be taken as a new run rate. We have captured just a fraction of the global travel market online and we remain firmly within the investment cycle focused on capturing worldwide market share.

In other key investment areas, we are pleased with progress that we made during the first half of the year. Our rest of world growth remained strong and notably our [apex] sales team was pleased to add ctrip to our growing list of partners in that region. In our subscription businesses, our business listing team has progressed nicely on their sales force hiring plan, enrolled a new mobile upgrade product as a value add for hoteliers and property owners. Finally, we are also executing easily in our vacation rental business on TripAdvisor, on Holiday Lettings, and Flipkey. In summary, we're tracking very well to our 2012 goals. I'll now turn the call over to Julie, who will provide some color on the Q2 results and our financial outlook.

Thanks, Stephen, and good afternoon, everyone. Second-quarter revenue increased 16% to $197.1 million, in line with our expectations. In constant currency, revenue was up 19% year-over-year. Click -based revenue was up 13% year-over-year to $151.1 million. The seven percentage point sequential deceleration in year-over-year growth rates can be explained by three main factors. We benefited from increased conversion, more than offset by year-over-year decline in pricing, and the traffic quality improvement strategy. We saw increased hotel shopper conversion in Q2 relative to Q1, albeit on a slightly lower hotel shopper growth rate.

Even with the unfavorable trend in foreign exchange rates, overall CPCs were stable in Q2 as compared to Q1. We did see CPCs increase in the US, but this was offset by CPCs decreases internationally. However, when looking at the year-over-year growth rates, sequentially, we had a tough pricing comp this past quarter compared to an easy pricing comp in the first quarter of this year. This accounted for 4% of the sequential year-over-year growth rate declined.

Finally, as Steve just described, we estimate that our traffic quality improvement strategy accounted for an additional 4% to 7% on the sequential year-over-year growth rate decline. Lots of moving parts but the core fundamentals remain strong. Display -based advertising revenue grew 14% year-over-year in Q2 to $26.6 million. The sequential deceleration was due in part to specific timing of ad purchases, including a unique customer buy during Q2 2011. Overall, our CPM prices increased slightly as compared to Q2 of last year. We continue to maintain a premium price in the CPM market and stable click-through rates given our rich travel-specific content.

Subscription transaction and other revenue which includes business listings, vacation rentals, and our transaction businesses, had a good Q2 growing 59% to $19.4 million just slightly behind our expectations. In business listings we continue to see a huge opportunity to diversify our customer base and develop a channel to distribute value-added products over the long-term.

Our near-term challenge is ramping sales execution on a global basis. Such as connecting with that BnB in Vermont, while also building relationships with a large independent hotel in Cancun, and concurrently determining the top domestic properties in Thailand. To that end, we are catching up to our aggressive sales force hiring plan and have seen encouraging productivity metrics. We remain focused on capturing the huge opportunity we have for business listings, as well as growing our vacation rentals products in 2012 and beyond.

As it relates to geographic mix, despite macroeconomic challenges and unfavorable foreign exchange movement, non-US revenue was 49% of total revenue during the second quarter, compared to 48% in Q1 and 44% in the second quarter of 2011. On the expense side, non-GAAP sales and marketing expenses were $63.3 million, or 32% of revenue for the quarter, which is down sequentially in both absolute value and as a percentage of revenue. This is primarily due to lower SEM spend related to our strategy to increase traffic quality to our customers. We remain committed to making investments in our strategic growth opportunities and traffic diversification efforts. Given our year-to-date results, however, we expect non-GAAP sales and marketing spend to remain under 40% as a percentage of revenue for full-year 2012.

Non-GAAP tech and content expenses were $19.1 million, or 10% of revenue for the quarter, which is up 17% sequentially driven by additional headcount costs and in line with our expectations. We expect this expense line to stay relatively constant on a dollar basis for the balance of the year. Non-GAAP G&A expenses were $14.8 million, or 8% of revenue in line with our expectations. Investment in our public company infrastructure is essentially complete and we expect quarterly G&A expenses to be relatively stable on a dollar basis for the balance of the year.

Depreciation and amortization totaled $6.5 million or 3% of revenue and stock-based compensation expenses were $6.8 million, or 3% of revenue in the quarter. For 2012, we continue to expect depreciation and amortization to be approximately 3% of revenue and stock-based compensation to be approximately 4% of revenue. Our effective tax rate was approximately 31.5% for the quarter. For the balance of 2012, we expect our effective tax rate to remain relatively unchanged.

In terms of liquidity, we ended the quarter with $478.2 million of cash and cash equivalents. In early May, the warrants we inherited from the spin off were exercised for approximately $213 million. The warrant exercises were the primary driver of the uptick in our basic and fully diluted weighted average share count for the period. Cash flow from operations was $61.8 million or 31% of revenue for the quarter. We continue to expect full-year 2012 cash flow from operations to track with adjusted EBITDA after providing for interest and taxes, or a low thirties as a percent of revenue.

Q2 CapEx was 3% of revenue, given our capital efficient business model we continue to expect this line item to remain in the low single digits as a percent of revenue for 2012. As a result, we generated $55.8 million of free cash flow during the quarter. In terms of headcount, we ended Q2 with just over 1,400 employees, up from just over 1,300 employees at the end of Q1. Hiring efforts for the balance of 2012 are global in scale and are focused on engineering and sales.

Also I'd like to provide a brief comment on foreign exchange impacts, given the prevailing macroeconomic challenges overseas. As we've mentioned in the past, we forecast FX mutuals based on current rates and do not try to anticipate movements in foreign exchange rates. Just over 20% of our revenue was denominated in Euros, and less than 10% in the British Pound. A significant move in FX would have the greatest impact on revenue, as we have natural hedges to help mitigate bottom line exposure.

With that, let me turn to our outlook for the balance of the year. We continue to expect 2012 total revenue growth in the high teens. On the click-based revenue line, we are factoring in the Olympics and the continuation of our traffic quality improvement strategies as headwinds in Q3. We are also planning to rollout enhanced analytics to some of our large OTA partners on a test basis. Many of these customers have asked for more transparency in order to better understand the bid landscape, and in turn, increase their spend. We recognize the uncertainty this may present to our revenue results. While more transparency allows them to bid higher on their more profitable properties, it does come with a risk that clients will choose to optimize their spend without increasing revenue to TripAdvisor.

In addition, we saw strong pricing in the second half of 2011, prior to the rollout of lower Expedia pricing at the end of the year. However, we expect continued strength in hotel shoppers and lapping of last year's site redesign to more than offset the potential headwinds I just described. Given all these dynamics, we currently expect click-based revenue growth in the mid- to high teens for the full year. Display-based revenue faces a tough comp in Q4 based on an unusually strong demand in Q4 2011 which may not reoccur. Given this, and our year-to-date performance, we now expect low double-digit annual revenue growth Display. We expect that full-year subscription transaction and other revenue growth will be consistent with our year-to-date results. Importantly, early indicators for all these revenue lines are healthy as we continue to leverage our leadership position in the market.

We continue to expect 2012 adjusted EBITDA to be higher than 2011 in terms of absolute dollars based on the better-than-expected results during the first half of the year. Given the strength in our core CPC business and reduced spend on SEM, we seek to reinvest all excess profits into our strategic growth opportunities and our traffic diversification efforts. We are committed to driving long-term user growth and engagement in the business. In closing, the second quarter closed out a great first half of 2012 for TripAdvisor. We'll now open the call up to your questions.

(Operator Instructions) Nathaniel Schindler; BofA Merrill Lynch.

Whenever Google makes quality improvement similar to what you suggested you did, and improves the conversion rates for its clients, they see an almost dear instantaneous improvement in CPCs because they have a very dynamic auction. Your auction is a little slower usually takes a couple of weeks for things to flow-through. Have you seen an impact from your quality improvements hitting CPCs with your clients now willing to spend more for higher-quality clicks yet?

Hello. Thanks very much for the question. We have seen since we've been rolling out the quality improvements over the course of the quarter, we have seen some initial results in some of our clients saying that the effort has been working. As you point out, since we don't have a lot of ability for our clients to take quick action for the properties that it's working for, it is much delayed in terms of us seeing an increase in CPCs, which is certainly what we would expect. All of our tracking metrics, again with the clients with whom we can get all the way down to conversion improvements, have shown distinct benefits from the strategy that we have undertaken. And I presume we've seen a modest increase in the prices that they paid per their profitability metrics.

Okay. And just on a second question that is related, as you cut off some of this lower quality SEM, where do you think you'll reinvest those marketing dollars going forward?

So as I indicated, we've disclosed that we've reinvested some of those marketing dollars into our Facebook campaigns. We may, going forward, choose to invest some of the dollars into some of the search engine marketing in our newer markets where the total dollar impact is less, but we are more intent on gaining trial. And I would also add, it was a meaningful shift in the way we are conducting our SEM business and SEM is a meaningful source of traffic for us. So, as the teams have now built in the new formulas, if you will, into their model, now we get to move forward and optimize on those. So, you could well see, we would hope to see, us just getting better at finding the right traffic that wants to not only convert on Trip, but convert all the way downstream. So, I don't think we'll be seeing a substantial additional cut back in the SEM versus now that we know the best spots to grow, we'll be able to reinvest some of those dollars in SEM itself.

(Operator I Instructions) Heath Terry; Goldman Sachs.

As you move to add to transparency within the bidding market I was wondering if you could give us the sense of how far you think ultimately you want this to go and what kind of impact you see it having on the number of participants? Either the number of participants in the market or overall potentially the impact that it could have on pricing, or even volatility of pricing? Do we ultimately see over time a realtime bidding market model the way you have with things like Google Adwords

Yes. Thanks, Heath. An excellent question. We are not sure yet if we'll evolve all the way to a real-time. Our customers aren't even necessarily asking for that level of information yet, but they do naturally want to know at a granular level, at a property level, how the conversion rate, how the clicks on TripAdvisor, the share of the market, and various bidding strategies that they can use to buy the traffic that works the best from therein. So, we're going from a every couple of weeks you can update a set of properties and looking to test out and we really have to learn how to do this effectively, test out over time a model where we are providing our clients a lot more information. And I can absolutely appreciate how from the client perspective we're an extremely valuable channel to them and they would like to know how they can effectively spend more by buying the type of traffic that they want and that our current system is just to primitive frankly for them to be able to do so. We are approaching it gingerly, in the sense that we don't have as many potential clients as someone like Google has, that could bid for words it is harder still on our system. And the dynamic is on TripAdvisor you are essentially mostly bidding for a dated search. It's not keyword matched and it involves a specific availability question that our users are asking, show prices box. So while everyone, of course, compares us to the Google option that they have, ours is in one way more complicated because we have to have the date information. And in one way simpler, we don't have to deal with broad matching or exact phrase or anything like that because you're bidding at the property level not the keyword Hope that helps.

Okay. Great. Thanks, Steve.

Tom White; Macquarie Research.

Two quick questions. One with regard to the comments about traffic diversification. Should we be reading that in the US you are investing in Facebook, but maybe the bulk of the reallocation is going to be outside the US to more search that you guys are benefiting in terms of getting more direct navigation traffic here in the US thanks to branding effort that you guys are doing with the widgets and all the third-party distribution? And then secondly, on business listing on the push there, should we be concerned about the reactions from your core OTA partners and your other show prices customers from the push here, particularly if you guys start to evolve the business listing product to stuff beyond the base phone number and web URL, to perhaps other types of advertising across TripAdvisor?

Sure. Thanks, Tom. First, let me offer some perspectives on how we look at Facebook. For us, Facebook is an excellent branding effort. It brings in lots of members. It is extremely global for us, so that's really not at all a US type initiative and search overseas. We think of Facebook as very global. We think of search in terms of brand-new markets are relatively low penetration for TripAdvisor versus mature markets. So we'll tend to lump Europe, UK, US, Canada, and several others as more mature markets. And Thailand, and Poland, and Brazil as newer markets. So, we tend to treat the ROI we expect on search at a different level depending on if it is mature or new. For Facebook, similarly, the advertising on Facebook, the pricing varies depending on the type of market that we're advertising in, but in general we go very global on that platform.

To the second question on reaction online travel agencies to business listings, no, we are not detecting frankly any feedback worth mentioning from the OTAs on having business listings on the site. A website link and email, a phone number, that's something that I think they are very used to doing in their channels. They are always offering their benefits over the supplier direct. I presume all of the OTAs would not be very happy if TripAdvisor.star turned into a booking agent, where we started actually taking the booking for a hotel room. And that's really not the media model that we're looking after. So, we view BL as fantastic additional channel marketing services for independent or chain hotel leaders around the globe and restaurants and attractions and other owners for whom we literally we are just offering marketing services. So, that was a long answer to a simple question, to say no negative reactions to OTAs for BL.

Herman Leung; Susquehanna Financial Group.

To quick questions for you. I guess, I know that it seemed like investors are a bit surprised at the whole strategy change. But I understand that it's basically more for a long-term diversification. I guess, can you explain to us the thought process? When the decision was made to change the allocation of spend more towards Facebook against Google? And what are the metrics that you are seeing away from SEM-type traffic against a Facebook traffic? And I have a quick follow-up.

Sure. So, we've been talking for a while about diversifying our traffic sources. So, search engines as you know are a significant source. Thank god, they are wonderful. We get a ton of free traffic. We buy a bunch of pay traffic. But we like to have other sources and we view it as key to our long-term success to generate our own domain direct, a higher rate of domain-direct traffic, and other sources by which people are learning about TripAdvisor. From the SEM decision to cut back, you can look at the revenue. You can look at the extra dollars, the millions of dollars, that we delivered on the bottom line that was above our own expectations and make the simple case that says, we should have spent it at even 50% ROI, spending $1 to make $0.50 and we could've bumped the topline up by millions of dollars. And that's a perfectly reasonable strategy.

It's not the one we took, because in that case, I am actually spending a chunk of money and losing it on search. And we decided that we would rather in our mature markets spend those dollars on, some of those dollars on, the more branding and membership acquisition channels. And Facebook is one that we are calling out because we are finding it's working for us. So, the working is a little more harder to quantify. It's not a direct ROI spend. But we are getting the content. We are getting the Facebook connected members which is really driving in our wisdom of friends strategy to build the value proposition beyond just a quick, hey let me check, read a hotel review and move on. I can appreciate how some of this may be a bit of a surprise. But I hope everyone can appreciate the balance of we have a lot of profit to spend.

We could have chosen to invest it, in my view unwisely, in search, which would've generated more hotel shoppers. It would have generated more top line revenue, but less of the type of revenue that we are looking for. Less of the longer term, we have you as a valuable customer going forward. So proof will be in the pudding over the next couple of years as the membership base grows and we continue to knock it out of the park in the content collection space. But you can see in the quarter where we've spent. And I guess the final part of my long-winded answer would be, we would have spent more in the second quarter had we had enough of the campaigns set up on channels like Facebook because we are pleased that we have found some things that to our metrics are working for us.

Great. Thanks. Just a very quick follow-up. As we head into the travel seasonality of the third quarter, have you seen linearity of the core continue to progress higher and accelerate from a traffic standpoint? Thanks.

The early indicators in July have been stronger in most markets than where we were finishing out Q2. I'm not sharing any surprises. We absolutely see what we believe to be the macroeconomic conditions in Europe being a drag on our revenue growth and our overall conversion growth. Hotel shoppers, interestingly enough, are doing okay in UK and Europe, not as strong as the US but still frankly pretty strong. But the conversion of those shoppers to folks that are clicking to our clients is weaker than the US. And then on our client-side, we are still seeing a pretty big hit there in terms of that traffic actually booking. And presumably if they're booking, maybe it is on cheaper properties. So, we see it as CPCs that come back to TripAdvisor. And the UK and EU is distinctly hurting compared to prior year. Frankly, we have no reason not to believe it's macroeconomic in nature, as people are taking less expensive vacations and shopping around more as opposed to buying more.

Great. Thank you very much, Steve.

Mike Olson; Piper Jaffray & Co.

Sorry to beat a dead horse here, but you talked about the significant uptick in usage of the app on Facebook and the increase spending there. While certainly like you said that improves brand awareness, are you able to determine what it means for conversion? I guess what you're saying is that SEM spend drives kind of instantaneous traffic flow, but it may not be as high of quality. So maybe what's the lag in the traffic growth in conversion from lower quality SEM-type traffic versus Facebook traffic that may be higher-quality?

Yes, hard for us to know the long-term answer to that question. Certainly, most of the SEM traffic that we buy in most markets interacts with the site, depending on the type of keyword they have a nice long session, and read tons of reviews. Other times, they do a quick price compare and depart. When they read the long reviews, we love it. We feel like we've got a great brand impression. And we presume that customer comes back more frequently than the one that just did a quick price compare and out the door. In most cases, we don't have a member at that point. We had a visit. And that's great from trial, but less good from a long-term perspective.

What we're doing on Facebook, it's almost the reverse. It really is not generating immediate revenue at all for us. It's not generating a lot of traffic to the site immediately, at least from the Facebook side of things. But it is generating a member that is interacting with our site, or our app, our Cities I've Visited app, who is generating content for us. We have an email and we know who their friends are. So we are sharing those ratings, reviews, tips, the whatever across a broader set of people. So, again, it is building up that set of Facebook connected members that now hear from us every week in whatever language they speak, almost. And we are able to tell them what their friends are doing and we believe and it will take a while to prove out, that those members upon seeing their friends interacting with TripAdvisor when they are ready to plan their next trip, come on back and do it on the site that they've been hearing about and that their friends are using TripAdvisor.

Thanks. And then from a geographic perspective, would you say you saw any weakness in any particular market? Like any headwinds from the broader challenges in Europe macro environment that we're hearing so much about? Or not really?

Well, we distinctly here, see our numbers demonstrate challenges specifically in Europe and UK. And, again, we see people still being interested in travel but even on our site they're converting less into clicks and when they get to our client sites, in general, they are converting we believe at a lower rate perhaps in some combination of buying cheaper stuff, all of which we see back as lower CPCs. So, again, really happy with what we're doing in the US and in some of our newer markets. Australia. But we do derive a fair chunk of business in Europe, UK, and folks are suffering there.

Anthony DiClemente; Barclays Capital.

I have a couple of quick questions. The first one is can you give us a sense of when timing-wise you began some of these quality improvements in the quarter? Has it been a constant roll out or was there a discrete time when you started those?

Yes, I'd say pretty early on in the quarter. I'd say at this point it's getting better. It was tested early on and we found that the conversion rates we got from some of our clients was demonstrating what we had known, and so we continued to roll it out. At this point, I think of it as fully rolled out. And we didn't really know. At the end of Q2, it was a theory and as we tested it, maybe by the end of April at that point, we had a pretty good idea that it was working.

Okay. That's helpful. Second one is just wondering to what extent and maybe this is more relevant to Julie's comments about CPC trending, but to what extent is mobile having an impact on CPC dynamics?

To the extent that we do believe some of our traffic is, I can't prove it but we believe it, some of our desktop traffic is moving over to mobile. And our customers are not behaving the same on mobile. Mobile being phone. Then, no doubt we are losing some clicks. It's hard for us to know whether the amount extra that we are gaining in all of the user engagement, all those millions of users that are picking up the phone and using TripAdvisor are then coming back to the desktop and doing their bookings there. We've just started to roll out functionality that allows you to save something on desktop and see it on mobile and vice versa. But the percentage of our audience that uses those features isn't enough to do a decent job tracking the follow-through.

Okay. Great. And then last one for me, Steve. The quality initiative that you articulated in your remarks and on the call, seems like a very well thought out and intelligent strategy to me. I think one question investors might have is at this early stage in your life cycle I think folks have been measuring your success and evaluating your progress by looking at revenue. So, to us it now seems like profitability is becoming incrementally of greater importance. And so when I look at your guidance and your target, they are mostly revenue -based and so I'm just wondering if, should investors really start to weight profitability and margins a little bit greater in looking at TripAdvisor and if so, do you expect to be giving more granular, more detailed profitability, or EBITDA targets for us with respect to guidance?

Fair question. I don't quite look at it that way, because I say as I look at the bottom line numbers, if we came in $5 million above what you thought on the bottom line, you know that we could have bought an extra $5 million to $10 million on top line, a monkey could have done that. Just not that challenging because you know we know SEM. So, you can adjust the top line. Bottom line, I am looking at it from a long-term, I need to get better at SEM so that I am spending efficiently, buying the traffic that not only converts on TripAdvisor, but really helps my clients. So, we embarked on that program to a degree we had more success with the front end piece of getting the right traffic to our site then we had on the spending piece to diversify the traffic.

You should still, I'd urge you to still look at, hey, what's the top line? How is the growth of the Company? How are hotel shoppers doing? What's the conversion rate? Factors, frankly, because our margins in our view are already outstanding. And then, when there's a lower than you might of thought on the top, but higher on the bottom, you can do the math and put it in reverse. In a similar way, if we blow out the top and I'm coming in below what I might have said on the bottom, you get the right to ask, hey, did you find some great investment vehicle that you are taking a bottom-line hit on in order to grow top. And if I find one of those I'm more than happy to explain it after-the-fact.

Okay. I understand. Thanks.

Scott Devitt; Morgan Stanley.

I had a follow-up on mobile and you have done a great job with the app downloads. I was just wondering if you do have a specific monetization strategy for mobile? Or if you view it long-term more as an engagement mechanism as you highlighted in the answer previously? And then secondly, I was wondering if you think the improvement in traffic quality and transparency that you're providing the partners, in terms of how they should bid, if that's going to require just an incremental tech platform spend and if so, if you could quantify that? Thanks.

Sure. So we'll do the second one first. Yes, we're putting a couple of additional, I'm not sure how many engineers against that particular project, but we are talking a small handful. So it's nothing that would be noticable in any of our lines in terms of building out that bidding system. Again, most of our clients primarily just want the information in order to be able to bid in a smarter way. So, that's a small resource allocation from my perspective.

To your mobile question, we absolutely do look at mobile as a revenue stream down the road. We continue to stay focused first on engagement. But we see the end market opportunity as being potentially meaningful down the road as we get to offer better marketing services to the restaurants and attractions that are in market versus the hotel purchase which is the absolute lion share of our revenue stream now. There is some internal debate as two how much online booking TripAdvisor is going to be a part of in the very front and hotel research experience. Just because on the phone, the screen is so darn small, are people going to want to review the information that TripAdvisor has versus their tablet?

And so, to the tablet point, we think tablet will mimic desktop and our most of our strategies we have on desktop will be just as applicable on tablet. And tablet could even become better as the user demographics of folks using tablets probably spend more than on desktop in general. So short answer is, at the moment it's more engagement and functionality. But we do believe that mobile, phone, will become a much more interesting revenue stream for us in the outgoing years.

Chad Bartley; Pacific Crest.

Looking at the year-over-year growth trends in your non-Expedia revenue we say a slowdown of about 10 points. And I wanted to ask is that really a function of the traffic quality initiative that we've talked a lot about and then the tough pricing comparisons? Or is there anything incremental or different going on that contributed to that slowdown?

Let's see. I suspect it's mostly around geographic mix. As we already talked about, Europe is a bit of a challenge. And we are just very global in terms of where our revenue is coming from. So, don't know a crisp answer to you. But I think I would point you in that direction with some combination of that traffic quality piece, I'm sure. I was partly wondering if there's any update you can provide as it relates to other advertisers, other OTAs, now that we are one quarter further away from TRIP becoming a stand-alone public company and potentially increasing their spend. Is there any update around that? Yes, absolutely. The update is I've personally met with many of the big clients. All our account managers have met with all of our big clients. And the message is just loud and clear to us, hey, we would like to be able to spend more of your platform. Nothing to do with corporate ownership stuff, just give us the information so that we can optimize our bid strategy so that it can be a win/win. We've heard some stories from our clients that talk about, we tried to spend more in the test, but it didn't work and we don't know why. And the answer in these sorts of environments is always, well in this part you did make more money, but in that you didn't. And our system isn't transparent enough to let them optimize on the plus side and revert on the negative side. And we've recognized that. We've told some of our major clients that this is coming. We are not secret about it. We just haven't gotten to everyone, necessarily. And it is in and we will be rolling it out in test mode because we do believe, how do I phrase this, many of our clients are adamant that if we provide them more visibility, they are absolutely ready to increase their spend. And that is why we call it in test mode as oppose to full mode because we haven't done it before. But we do think that there is more dollars there.

Great. Thank you very much for that.

Douglas Anmuth; JPMorgan.

Just want to ask about two things. First on CPCs, can you just talk about the overall outlook for 2012 relative to the flattish that you previously have stated? And just thinking there about the potential lift from quality changes and offsetting the macro pressures that you're seeing? And then also if you could characterize how you're thinking about the environment as it relates to algorithmic search results for you guys? Would you say that things are fairly stable in terms of what is happening on the natural results of Google pages? Thanks.

Sure. Thanks, Doug. The CPC outlook, I would say we did have some tougher comps though when you look Q1 to Q2, it was basically flat if I'm not mistaken. Even though we had the CPC declines in Europe offset by CPC growth, pricing increased in the US. So, we look at that and say, we think what we're doing, were it not for the macroeconomic climate in Europe, would be sending CPC prices higher across the board. And, again, they are strong in many regions. We think that does have to do with our site redesign changes from last year. The quality improvement that we made on our SEM traffic this past year certainly contributing. And just some other pieces of the site personalization efforts that we feel are driving higher qualified traffic to our clients. So, going forward, I'm not going to be able to offer any prediction on the travel climate in Europe. Generally when we forecast we take the position of, all right, next quarter is going to have the same mood, the same effects, the same everything as we have today. And so if you guys are betting things are going to get better than that will help us. If they're going to get worse that will hurt us. We believe ourselves to be reasonably sensitive to the overall economic climate.

To your second question, algorithmic search results, we haven't seen much change by way of what Google has done in the past quarter. We don't think anything has affected us in a meaningful way. Certainly, we are pleased that we continue to have growth in our SCO channel across I got a believe all major markets. But we would absolutely expect that as the cycle of content creation has grown in all languages. So, again, we get more content, more freshness, better results for the user, Google favors sites that offer better results. We are one of those so we tend to rise in the rankings. I haven't seen, to give a follow-up to your question, Google places or local or whatever they're calling it now come out with any particularly interesting new features that we think are pulling traffic away from TripAdvisor. So, again, stable. The integration they have with [segaps] does appear more in the search results. Again, more on restaurants than hotels so less meaningful to our business.

Mark Mahaney; Citigroup.

One quick follow up question on the attempt to the goal of improving the quality of the traffic to the clients, to customers. That seems very straightforward. But what's driving that? And to what extent has there been a decline in the conversion and a decline in the quality of those leads that you've been delivering? Is this something that clients have noticed? OTAs have noticed and have brought up to you? Or is it that you just looked across your marketing channels and discovered just a better mousetrap? Thanks.

We did see some indications from some of our clients about a decline in conversion of our traffic. Where we get good data from clients on conversion, of course, we like to act upon it when we can make an intelligent conclusion. When we sliced and diced and said, hey, why is this conversion going down in certain markets it's understandable and in other markets it wasn't. And we've seen good growth in our SEM traffic year-over-year from 2011 over 10, and 12 over 11. And so one of the things that we found when we sliced and diced is that some of the traffic that we were buying on SEM, and as I've said before, sometimes we will buy on a barely profitable basis in a mature market. You can appreciate how if I'm buying a word at $0.50 and someone comes to the site and they click around, visit pages, and then we sell a qualified user to our partner for $0.49, then I've bought a profitable visitor. I am happy to do that all day long.

The profit isn't much, but it got me trial, and that was a successful event for us. If it turns out that that visitor upon going to our client actually bought something at only half the rate of our normal traffic, then it turns out that that click to the client wasn't really worth $0.49 on average, it was only worth $0.25. But wait a minute, if I bought the traffic at $0.49 and sold it to my client at $0.50 but it was really only worth $0.025 because it converted at half the rate, then I ended up buying it at $0.49, selling it at $0.25, and I actually lost money on that SEM transaction. That was part of the dimension that we discovered. It's not like it was really a bad thing for the business in general, because we got someone to give TripAdvisor a try. They had a successful experience. They read a review, presumably. They went off and clicked on a client site. But they didn't convert as much. And maybe it's because of this particular keyword that we were buying or the experience that we put them through as they landed on TripAdvisor.

So, our Q2 efforts, and I'm sure this is way more detail than you were looking for, but the Q2 effort was really, let's not buy as much of that traffic because it's not really meeting our objective of being for that mature market, being profitable on every click that we are buying. So, we let go some of that traffic and are choosing to reinvest it elsewhere.

Peter Stabler; Wells Fargo Securities.

I think you told us that the comp's core date was up 31% and that your hotel shopper was tracking with that at about 30% year-on-year growth. I'm wondering if you could give us some regional color there and maybe compare and contrast mature markets with international growth markets? And specifically Asia? And I have one quick follow-up. Thank you.

Good, fair questions. I'm not sure how much of those numbers I have at my fingertips. I can give you the hotel shoppers were growing between UK, Europe, US, US grew the fastest in terms of shoppers and revenue, in fact. UK and Europe were kind of tied in terms of hotel shopper growth, but meaningfully less than what the US was growing at. I haven't told you the rest of the world. I don't have that that handy here. But I can tell you that US grew faster than the 31%, than the 30% that approximate number. That the UK and the EU was last.

A bit more important than the actual hotel shopper growth is how those shoppers turned into revenue which was a much more dramatic shift. So, the US was significantly above our year-on-year growth numbers compared to the average, and EU and UK was significantly below.

Any color on China?

China, from an overall CPC number, still isn't meaningful enough to substantially color the overall averages. I look at China less from a our CPCs is up or down in that part of the world, than how are we doing on overall reach? How are we doing on the site engagement metrics? Are people sticking around longer? And we've cut back on some of our spend as we've done a few things to improve the product, adding ctrip. That's a big win in that market. They are not on [chumara]. They don't play in too many other channels. But we've got them on board and that's probably with most, if not all of their inventory, and that helps our user experience. And it adds to our bottom line or top line. But at the end of the day, it just delivers the visitor to [dowdow] more choice and that is the most important piece of it for us right now.

Brian Nowak; Nomura Securities.

I have two questions. First, going back to Europe for second. I was wondering if you could talk about the European conversion and how it trended throughout the quarter and now as you head into July and August? Is it getting any materially worse? Or has it been a steady just lower rate of conversion since the beginning of the year?

Let's see. I see the conversion in Europe, I'd color it as mostly steady in terms of, it wasn't good in Q1 and it may have fallen a bit in Q2. I'm hesitating only because I am not sure if I'm looking at all of the numbers synthesized. So, I don't want to convey a misimpression for you. Sorry about that. Because of our on-site efforts with personalization, I think that Europe actually converted to clicks outbound a little bit better but probably got hit worse on the pricing side as prices went down more in the second quarter.

Yes. We saw a steady decline in pricing in AMEA throughout the quarter.

There we go, a definitive answer.

Great, and the other question I want to ask is on the hotel shopper growth. Can you help us in 2011 what was the Q2 11 hotel shopper growth? And how did that trend through 3Q and 4Q of last year?

I don't have those numbers with me. So, I am sorry. I just don't think I can answer that. I'm trying to just think back to what was happening in the second half last year. And I don't think there were any surprising big growth shoots. So I don't think on the hotel shopper side we'll be facing any tough comps in terms of the shoppers. The comps will be around pricing expedia stuff and strong pricing before that, and then the conversion which will help things along because we'll have lapped that in Q4.

The mapping of the site redesign.

So no changes all as Google changed its strategy in the back part of the summer last year with places?

I don't recall having a big places impact in the back half of the year. There is always something, well I can say, we haven't modeled an increase a meaningful increase in hotel shoppers in the back half of the year based upon a particular weakness in the second half from last year.

Thank you. This ends the Q&A portion of this conference. I'd like to turn the call over to the CEO, Steve Kaufer, for any closing remarks.

Great. Well, I just want to thank everyone for joining our call today, as well as all TripAdvisor employees around the globe for their hard work this quarter. And, of course, we look forward to talking with everyone next quarter. Thanks very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may now disconnect. Have a wonderful day. [ End of Transcript ]