) reported another good quarter, with earnings topping the Zacks
Consensus Estimate by 12 cents, or 16.9% (the Zacks ESP, or
expected surprise prediction was 11.3%). While expenses continued
to increase, revenue growth outdid the impact, as well as the
impact of a higher tax rate.
Investors bought enthusiastically, sending shares up 14.6% in
after-hours trading (following the 3.3% increase during the
Revenue for the quarter was $1.04 billion, up 27.4% sequentially
and 13.8% year over year. Management stated that the VIA
acquisition contributed 2 percentage points of revenue growth.
Currency was even more negative than expected, without which
revenue growth would have been stronger, and bookings growth and 3
percentage points of adjusted EBITDA growth.
Revenue by Segment
Leisure customers remained the significantly larger contributors
to in the last quarter, generating around 93% of revenue. Corporate
customers (Egencia) accounted for the balance. The two segments
grew 26.2% and 43.4%, respectively from the previous quarter and
were up 11.3% and 61.7%, respectively from the year-ago
With TripAdvisor gone, Expedia is almost totally dependent on
the Leisure segment (although it is beefing up the Egencia segment
with acquisitions). The Leisure business continues to be driven by
hotel revenue, since rising airfares are impacting ticket
Room nights continued to increase double-digits slightly offset
by a 1% drop in the ADR, indicating higher demand and Expedia's
broadening reach. Room night growth was even higher including its
JV with Air Asia.
However, the revenue per room night declined, impacted by higher
mix of chain hotels. Overall, 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 in the next few quarters.
While the leisure segment is the largest and most important for
Expedia, it is clear that the company is gaining ground in the
Egencia (corporate) segment as well. Corporate spending on travel
continues to pick up, despite the rising airfares that were
negative to Expedia's leisure business in the last quarter. Egencia
has increased at a double-digit year-over-year clip in each of the
last eleven quarters and growth rates appear sustainable.
Revenue by Channel
Around 76% of total revenue was generated through the merchant
business (direct sales), another 21% 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 grew 20.9%,
30.5% and 3.2%, respectively in the last quarter. Growth from the
year-ago quarter was 10.0%, 14.9% and 10.3%, respectively.
Revenue by Product Line
Hotel and Air, the two main product lines grew 16% and 8%,
respectively from the year-ago quarter. The increase in Hotel
revenue came from a 22% increase in room nights and a -1% decline
in the average daily rate ("ADR"). Revenue per night dropped
The results are mix-driven. The increase in ticket revenue was
attributable to a 3% increase in ticket volumes even as airfare
growth increased 5%. The revenue per ticket dropped 11%.
Revenue by Geography
Around 58% of Expedia's quarterly revenue was generated
domestically, with the remaining 42% coming from international
sources. The domestic business grew 22.4% sequentially and 14.3%
from a year ago. The international business grew 35.1% sequentially
and 13.1% from last year.
Hotels.com did extremely well in the U.S., was impacted by
softness in Southern Europe, but did well in Asia. Additionally,
the JV with Air Asia generated solid growth in Asia.
Bookings and Revenue Margin
Gross bookings were $8.96 billion in the last quarter, up 6.4%
sequentially and 12.6% year over year. The revenue margin was
11.6%, up 191 bps sequentially and 13 bps from a year-ago
indicating higher conversions. Overall, conversions improved across
segments, geographies and channels and were in line with
International conversions were a shade better than domestic and
Leisure conversions were higher than Egencia, although Egencia was
up pretty strongly from last year. Both agency and merchant
channels saw higher conversions.
The pro forma gross margin for the quarter was 77.9%, up 242 bps
sequentially and down 68 bps year over year. Higher costs for
credit card processing (due to merchant bookings growth) and higher
personnel expenses due to increased headcount, additional costs
related to VIA were only partially offset by lower debit card fees
credit card rebates.
The number of transactions increased from 20.2 million in the
year-ago quarter to 23.1 million in the last quarter. However,
gross profit dollars continued to grow from $717.8 million in the
year-ago quarter to $810.2 million in the last quarter.
The operating expenses of $643.8 million were up 14.0%
sequentially and 13.8% from last year. It appears that some costs
were pushed into the third quarter, without which expenses would
have been up more significantly.
As a result, the operating margin came in at 16.0%, up from 6.3%
in the previous quarter and down slightly from 16.7% a year ago.
All expenses declined sequentially as a percentage of sales, with
S&M declining the most, followed by cost of sales, technology
and content and G&A in that order. S&M also declined from
the year-ago quarter (pushed into the third quarter), with all
other expenses increasing.
Adjusted EBITDA as reported by the company was $222.9 million,
up 119% sequentially and 18% from the year-ago quarter.
On a pro forma basis, Expedia generated a net income of $114.5
million, or a 11.0% net income margin compared to $24.7 million, or
3.0% in the previous quarter and $95.3 million or 10.4% net income
margin in the same quarter last year. The fully diluted pro forma
earnings per share (EPS) were 83 cents, compared to 18 cents in the
March 2012 quarter and 69 cents in the comparable prior-year
Our pro forma estimate excludes intangibles amortization
charges, legal reserves and occupancy tax assessments 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 management.
Including the above special items, as well as discontinued
operations and non controlling interests, the GAAP net income
available for Expedia shareholders was $105.2 million ($0.76 a
share) compared to loss of $3.3 million ($0.02 a share) in the
previous quarter and income of $140.4 million ($1.01 a share) in
the year-ago quarter.
Cash and short term investments totaled $2.39 billion at
quarter-end, up $395.8 million during the quarter. The net cash
position of $1.14 billion was significantly higher than the $748.4
million in net cash going into the quarter.
Including long-term liabilities, the debt to total capital ratio
was 43.4%, still at manageable levels. Days sales outstanding
(DSOs) went from 46 to 45. We note that around 40% the assets is
goodwill (not a real asset).
Expedia generated $552.8 million of cash from operations in the
last quarter. It spent $66.4 million on capex, $199.3 million on
acquisitions, $12.2 million on dividends and $99.5 million on share
Expedia topped both revenue and earnings expectations in the
last quarter, helped by a stronger travel market all over the
world, a contribution from VIA and the push-out of some costs into
the next quarter. Online travel booking is particularly buoyant
because of the shift from offline channels.
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
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
technology upgrades will negatively impact margins in the near
term, the investments could only be considered fruitful if they
result in better conversions.
Over the long term, we consider this investment a positive for
investors, since it has the potential to generate stronger revenue
and profits going forward. However, the near-term impact is likely
to be negative.
Of course, the company will continue to face challenges from
) and Travelocity, as well as a growing number of local Chinese
players that could make expansion in the fast-growing Chinese
) venture into the travel market is expected to increase costs for
Expedia. The TripAdvisor spin-off is a positive in this respect,
although Expedia is losing the advertising hedge it has enjoyed in
the past. Competition aside, Expedia and other online travel agents
continue to fight the incidence and collection of occupancy
We have a Zacks Rank of #2 on Expedia shares, which translates
to a short term Buy rating. We remain Neutral on a long-term
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