) reported third-quarter earnings of $1.26 that grew 124.1%
sequentially and 0.3% year over year to meet the Zacks Consensus
Estimate. Excluding stock based compensation and unrealized gains
on revenue hedges (as reported), pro forma earnings would have
been 17 cents higher. Investors responded to the reported
numbers, sending shares up 18.8% in after-hours trading.
Revenue for the quarter was $1.40 billion, up 16.3%
sequentially and 16.9% year over year. While growth rates across
most brands were healthy, Expedia, Trivago and Hotels.com were
strongest. The Hotwire brand was again impacted by the domestic
car business (fleet constraints and attempts to drive up
Revenue by Segment
Leisure customers remained the significantly larger
contributors in the last quarter, generating around 94% of
revenue. Corporate customers (Egencia) accounted for the balance.
The two segments grew 18.6% and -10.5%, respectively from the
previous quarter and were up 17.4% and 9.0%, respectively from
the year-ago quarter.
With TripAdvisor gone, Expedia is almost totally dependent on
the Leisure segment (although it has been beefing up the Egencia
segment with acquisitions). Expedia continued to benefit from the
acquisitions of VIA Travel that closed in the second quarter of
2012 and trivago, which closed in the beginning of March 2013.
VIA's operations are mostly in Northern Europe, which has done
much better than the South in recent times.
Revenue by Channel
Around 69% of total revenue was generated through the merchant
business (direct sales), another 24% came through the agency
model (where Expedia operates as an agent of the supplier) and
roughly 8% came from Advertising and Media. The three channels
were up 22.2%, 12.6% and 36.3%, respectively from the Jun quarter
of 2013. Growth from the year-ago quarter was 40.4%, 3.5% and
Revenue by Geography
Around 51% of Expedia's quarterly revenue was generated
domestically, with the remaining 49% coming from international
sources. The domestic business grew 10.3% sequentially and 9.6%
from a year ago. The international business was up 23.4%
sequentially and 25.7% from last year. Trivago and eLong helped
the international business grow in the last quarter.
Revenue by Product Line
Hotel and Air, the two main product lines grew 11% and 16%
respectively from the year-ago quarter. The increase in Hotel
revenue came from a 20% increase in room nights supported by a
flat average daily rate ("ADR"). Revenue per night dropped 7%,
which management attributed to lower-cost inventories in places
like China. In the last quarter, international room night growth
of 28% was more than double the domestic room night growth of
Mix was clearly negative, as the growth in Asia (much lower
ADRs and revenue per room night) remains much stronger than other
regions and this will likely remain a negative impact on hotel
margins, while driving up volumes. The added scale of the
lower-margin business is expected to more than make up for the
negative mix impact going forward.
The increase in ticket revenue was attributable to a 7%
increase in ticket volumes and a 3% increase in airfares. Revenue
per ticket increased 9%.
Bookings and Revenue Margin
Gross bookings were $10.44 billion in the last quarter, up
3.1% sequentially and 15.2% year over year. The revenue margin
was 13.4%, up 152 bps sequentially and 18 bps from a year ago due
to a stronger leisure business. Merchant conversions appear to be
trending down. Domestic conversion for the quarter declined from
The pro forma gross margin for the quarter was 80.3%, up 208
bps sequentially and 61 bps year over year. Higher costs for
credit card processing (due to merchant bookings growth) and
higher headcount were offset by higher volumes. As a result,
there was a 19.4% sequential and 17.8% year-over-year increase in
gross profit dollars.
The operating expenses of $823.0 million were up 4.7%
sequentially and 20.2% from last year. As a result, the operating
margin expanded 893 bps sequentially while dropping 108 bps year
over year to 18.8%. As a percentage of sales, selling and
technology costs declined sequentially, although general and
administrative expenses increased. All except selling and
marketing expenses declined from the year-ago quarter.
Adjusted EBITDA as reported by the company was $339.9 million,
up 77% sequentially and 16% from the year-ago quarter.
On a pro forma basis, Expedia generated a net profit of $177.2
million, or 12.6% net profit margin compared to $79.4 million, or
6.6% in the previous quarter and $177.9 million or 14.8% net
income margin in the same quarter last year.
Our pro forma estimate excludes intangibles amortization
charges and legal reserves on a tax-adjusted basis but includes
deferred stock compensation. Our pro forma calculations may
differ from management's presentation due to the
inclusion/exclusion of some items that were not considered by
Including the above special items, as well as non controlling
interests, the GAAP earnings attributable to Expedia shareholders
was $170.9 million ($1.22 a share) compared to $71.5 million
($0.51 a share) in the previous quarter and $171.5 million ($1.21
a share) in the year-ago quarter.
Cash and short-term investments totaled $1.81 billion at
quarter-end, down $457.8 million during the quarter. As a result,
the net cash position of $563.0 million was down significantly
from $1.02 billion in net cash going into the quarter. Including
long term liabilities, the debt to total capital ratio was 49.8%,
still at manageable levels. Days sales outstanding (DSOs) went
from 52 to 45. We note that nearly 45% of assets is goodwill (not
a real asset).
In the last quarter, Expedia used $224.2 million of cash in
operations. It spent $77.6 million on capex, $20.5 million on
dividends and $221.5 million on share repurchases.
Expedia reported a strong third quarter, driven by the growth
in the online travel booking industry. Additionally,
TripAdvisor's transition to the metasearch model appears
successful, which had a positive impact in the last quarter. As a
result, selling and marketing costs are coming down. However,
Expedia is expected to continue investment in international
markets because of the higher growth potential in these
However, growth in these markets comes at a cost. The
Asia/Pacific region for instance is likely to remain one of the
strongest drivers of the company's business over the next few
quarters, particularly since online penetration in many
Asia/Pacific markets remains relatively low. The company has
responded by steadily increasing its hotel inventory and entering
into strategic relationships, such as the one with Air Asia.
However, profitability here depends on very high volumes, since
the region typically yields lower ADRs.
Of course, in every region, the company will continue to face
challenges from players like
), Travelocity and
), as well as a growing number of other local players that could
make expansion more difficult.
Expedia shares carry a Zacks Rank #3 (Hold).
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