) is set to release its Q3 2013 earnings results on Wednesday,
October 30. The leading online travel agency (OTA) reported weak
results in Q2 2013 owing to increased competition in the OTA space,
and inventory pressures on its Hotwire brand. Total revenue
increased 16% y-o-y to $1.21 billion, while net income declined by
more than 30% to $63 million. The divergence in the top-line and
the bottom-line growth was due to operating expenses, mostly sales
and marketing related, growing faster than revenues to counter
competitive forces and retain market share.
We see rising competition as a major threat for Expedia in the
near future. Its closest rival, Priceline (
) , is aggressively expanding in the U.S., Expedia's primary
market, via its booking.com brand. With over
share of the OTA market, booking.com is the largest OTA in Europe.
Expedia could lose its market share to competition in the U.S. if
it does not take steps to increase its brand strength.
In the back half of 2012, Expedia launched the Expedia Traveler
) program that provides customers the option to pay at the time of
booking (merchant model) or pay at the time of checking out of the
hotel (agency model). The program is showing increased strength.
More than 30,000 hotels have signed up for the program since its
launch. Although ETP is rapidly spreading across the globe, it
is also impacting Expedia's overall revenue margins.
Competition To Put Pressure On Room Night Growth And
Expedia faced heightened competition in Q2 2013 in the off-line
brand marketing channel from Booking.com, TripAdvisor and its own
Trivago. In order to maintain its leadership position in the U.S.,
the company had to raise its investments in sales and marketing by
more than 33% y-o-y in Q2 2013 to $590 million. Intense competition
also resulted in weaker growth in direct type-in traffic, which is
the most efficient traffic for customer loyalty and profitability
according to the company's management.
Room night growth at Expedia decelerated to 19% y-o-y in Q2 2013
from 28% in Q1 2013. The timing of Easter, disruptions at eLong,
and low bidding activity on TripAdvisor due to the meta display
transition contributed to the deceleration. Since these
headwinds have mostly faded by now, we believe that rising
competition in the travel space will be the major challenge for
Expedia going forward.
The growing strength of Priceline's booking.com brand is the
biggest threat to the company. The former has built a dominant
position in Europe, and is now marching towards the U.S. The
world's largest economy is Expedia's biggest market, with over
contribution to total revenues. Expedia's room night growth could
decelerate further, and high selling and marketing investments
could impact its operating margins, if there is no respite from
heightened competitive activity.
Rising Agency Model Revenues To Drive Down Revenue Margin
On Hotel Bookings
Under the agency model, the hotel supplier is the merchant of
record, and revenue margins are low since net revenues are
generated in the form of commissions and bookings fees. On the
other hand, Expedia is the merchant of record under the merchant
model, which gives it some level of control over the pricing. This
offers scope for charging higher margins.
During 2010-2012, merchant model revenues grew faster than
agency model revenues. Consequently, the revenue contribution of
agency model declined from 24% in 2010 to 22% in 2012.However, the
agency model is now gaining preference from hoteliers via the ETP
program, since guests prefer to pay at the time of checking out of
the hotel. The ETP program also increases the average length of
stay. Hotels that have converted to ETP are witnessing market share
increases. This has resulted in Expedia's agency model revenues
growing faster (25% y-o-y) than merchant model revenues (14%
y-o-y), in the first half of 2013.
We believe Expedia's customers will adopt ETP program at a fast
pace as the program is rolled out globally, leading to further
increases in revenue contribution from the agency model. Since
revenue margins are lower under the agency model, we expect
Expedia's overall revenue margin to decline in the future.
We will update
our $62 price estimate for Expedia
after the company's quarterly earnings announcement on October 30,
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