) reported fourth-quarter earnings that were 3 cents short of the
Zacks Consensus Estimate, although revenue exceeded by 4.7%.
Technology improvements and brand building drove better
conversions across categories, geographies and channels.
Therefore, despite the increase in related costs, share prices
gained 3.6% during the day and another 5.0% after-hours.
Revenue for the quarter was $974.9 million, down 18.7%
sequentially, but up 23.8% year over year.
Revenue by Segment
Leisure customers remained the significantly larger
contributors in the last quarter, generating around 91% of
revenue. Corporate customers (Egencia) accounted for the balance.
The two segments grew -20.6% and 9.0%, respectively from the
previous quarter and were up 19.9% and 88.9%, respectively from
the year-ago quarter.
With TripAdvisor gone, Expedia is almost totally dependent on
the Leisure segment (although it is beefing up the Egencia
segment with acquisitions). Expedia continued to benefit from the
acquisition of VIA Travel that closed in the second quarter of
2012. VIA's operations are mostly in Northern Europe, which has
done much better than the South in recent times.
Revenue by Channel
Around 75% of total revenue was generated through the merchant
business (direct sales), another 22% came through the agency
model (where Expedia operates as an agent of the supplier) and
roughly 3% came from Advertising and Media. The three channels
were down 9.8%, 21.5% and 5.7%, respectively from the Sep quarter
of 2012. Growth from the year-ago quarter was 26.9%, 23.5% and
Revenue by Product Line
Hotel and Air, the two main product lines grew 25% and 10%
respectively from the year-ago quarter. The increase in Hotel
revenue came from a 33% increase in room nights and a 3% decline
in the average daily rate ("ADR"). Revenue per night dropped 6%.
In the last quarter, international room night growth of 49% was
nearly three times the domestic room night growth of 19%.
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. Expedia believes that the
added scale of the lower-margin business would more than make up
for the negative mix impact going forward.
Air was around 26% of revenue in the last quarter, a 10%
increase from last year. The increase in ticket revenue was
attributable to a 12% increase in ticket volumes and 2% increase
in airfare. Revenue per ticket declined 2%.
Revenue by Geography
Around 52% of Expedia's quarterly revenue was generated
domestically, with the remaining 48% coming from international
sources. The domestic business was down 21.9% sequentially,
although it remained 12.6% higher than a year ago. The
international business grew 24.1% sequentially and 22.2% from
last year. The international business declined 14.9% on a
sequential basis and was up 39.3% year over year.
Bookings and Revenue Margin
Gross bookings were $7.53 billion in the last quarter, down
16.9% sequentially and increasing 19.3% year over year. The
revenue margin was 13.0%, down 28 bps sequentially but up 48 bps
from a year ago indicating higher conversions on a year-over-year
basis due to strength across segments, channels and
Conversions in both the domestic and international businesses
followed the same trend. Corporate conversions were better than
leisure and agency conversions better than merchant in the last
The pro forma gross margin for the quarter was 76.9%, down 277
bps sequentially and up 21 bps year over year. The sequential
decline in volumes was the most important reason for the
Higher costs for credit card processing (due to merchant
bookings growth), higher headcount and other costs related to VIA
and increased headcount costs to support other operations across
the world were partially offset by higher credit card rebates. As
a result, gross profit dollars declined from $955.4 million in
the year-ago quarter to $749.7 million in the last quarter.
The operating expenses of $626.4 million were up 12.6%
sequentially and 23.9% from last year. This drove the operating
margin to 12.7%, down from 19.9% in the previous quarter and up
slightly from 12.5% a year ago. All except S&M expenses
increased sequentially as a percentage of sales. However, both
S&M and technology & content costs increased from last
Adjusted EBITDA as reported by the company was $184.6 million,
up 37% sequentially and 14% from the year-ago quarter.
On a pro forma basis, Expedia generated a net income of $73.2
million, or a 7.5% net income margin compared to $177.9 million,
or 14.8% in the previous quarter and $63.4 million or 8.1% net
income margin in the same quarter last year. The pro forma
earnings per share (EPS) were $0.52, compared to $1.26 cents in
the Sep 2012 quarter and $0.46 cents in the Dec quarter of
Our pro forma estimate excludes intangibles amortization
charges, legal reserves and other items on a tax-adjusted basis,
excluding a one-time tax reserve but including 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 management.
Including the above special items, as well as discontinued
operations and non controlling interests, the GAAP net income
available for Expedia shareholders was $9.05 million ($0.06 a
share) compared to $171.5 million ($1.21 a share) in the previous
quarter and income of $70.3 million ($0.51 a share) in the
Cash and short term investments totaled $1.94 billion at
quarter-end, down $418.9 million during the quarter. The net cash
position of $688.8 million was down significantly from $1.11
billion in net cash going into the quarter. Including long-term
liabilities, the debt to total capital ratio was 42.9%, still at
manageable levels. Days sales outstanding (DSOs) went from 43 to
42. We note that over 40% the assets is goodwill (not a real
In the last quarter, Expedia used $216.7 million of cash in
operations. It spent $58.7 million on capex, $87.9 million on
dividends and $51.5 million on share repurchases.
Expedia topped our revenue expectations in the last quarter,
helped by a stronger travel market all over the world, a
contribution from VIA and strategic expansion in Asia. Online
travel booking is particularly buoyant because of the shift from
The opportunity in the Asia/Pacific region is significant and
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. An improved technology platform should lead to
continued improvement in conversion rates going forward.
The increasing presence in Asia does have a downside with
respect to margins given the lower ADRs. While it is true that
this as well as technology upgrades will negatively impact
margins in the near term, we consider the investment a positive,
since Asia is one of the fastest-growing regions that should give
Expedia the scale required to generate higher profits over the
Of course, the company will continue to face challenges from
), Travelocity and
Ctrip.com international Ltd
) as well as a growing number of other local Chinese players that
could make expansion in the fast-growing Chinese market
difficult. Competition aside, Expedia and other online travel
agents continue to fight the incidence and collection of
Expedia shares carry a Zacks Rank #3, which translates to a
short term Hold rating. We remain Neutral on a long-term
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