Expedia Inc . ( EXPE )
reported another good quarter, with earnings topping the Zacks
Consensus Estimate by 9 cents, or 7.7%. While expenses continued to
increase, revenue growth outdid the impact.
The strong results sent share prices soaring 15.5% in
after-hours trading (more than offsetting the 1.9% decline during
Revenue for the quarter was $1.20 billion, up 15.3%
sequentially, 17.5% year over year and 2.5% higher than consensus
expectations of around $1.17 billion.
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 16.3% and 2.6%, respectively from the previous quarter and
were up 14.9% and 77.3%, 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). Corporate spending on travel has turned a bit
cautious in the U.S., but Expedia gained in the last quarter from
the acquisition of VIA Travel. VIA's operations are mostly in
Northern Europe, which has done much better than the South.
Revenue by Channel
Around 77% of total revenue was generated through the merchant
business (direct sales), another 20% 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 6.8%,
18.2% and 9.4%, respectively from the June quarter of 2012. Growth
from the year-ago quarter was 8.8%, 19.7% and 29.6%,
Revenue by Product Line
Hotel and Air, the two main product lines grew 20% and -10%
respectively from the year-ago quarter. The increase in Hotel
revenue came from a 27% 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 38% more than
doubled the domestic room night growth of 17% and for the first
time, made up 50% of total room nights.
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 in the next few quarters. 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 7% of revenue in the last quarter. The decline in
ticket revenue was attributable to a 19% decline in the revenue per
ticket that offset the 11% increase in ticket volumes and 1%
increase in airfare.
Revenue by Geography
Around 55% of Expedia's quarterly revenue was generated
domestically, with the remaining 45% coming from international
sources. The domestic business grew 8.8% sequentially and 13.9%
from a year ago. The international business grew 24.1% sequentially
and 22.2% from last year. The international business gained from
acquisitions and agreements that Expedia has been entering into in
the last few quarters.
Bookings and Revenue Margin
Gross bookings were $9.06 billion in the last quarter, up 1.1%
sequentially and 18.8% year over year. The revenue margin was
13.2%, up 163 bps sequentially and down 14 bps from a year ago
indicating higher conversions on a sequential basis due to strength
across segments, channels and geographies. International
conversions weakened however, particularly for leisure travel.
The pro forma gross margin for the quarter was 79.7%, up 177 bps
sequentially and down 9 bps year over year. 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
lower debit card fees credit card rebates. However, gross profit
dollars continued to grow from $814.0 million in the year-ago
quarter to $955.4 million in the last quarter.
The operating expenses of $716.5 million were up 11.3%
sequentially and 22.4% from last year. As a result, the operating
margin came in at 19.9%, up from 16.0% in the previous quarter and
down from 22.4% a year ago. All expenses declined sequentially as a
percentage of sales, with G&A declining the most, followed by
cost of sales, technology and content and S&M in that order.
All except G&A were however up from last year, with S&M
increasing the most.
Adjusted EBITDA as reported by the company was $293.6 million,
up 31.7% sequentially and 5.7% from the year-ago quarter.
On a pro forma basis, Expedia generated a net income of $177.9
million, or a 14.8% net income margin compared to $114.5 million,
or 11.0% in the previous quarter and $191.4 million or 18.8% net
income margin in the same quarter last year. The fully diluted pro
forma earnings per share (EPS) were $1.26, compared to 83 cents in
the June 2012 quarter and $1.37 cents in the September quarter of
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 $171.5 million ($1.21 a
share) compared to $105.2 million ($0.76 a share) in the previous
quarter and income of $209.5 million ($1.50 a share) in the
Cash and short term investments totaled $2.36 billion at
quarter-end, down $36.4 million during the quarter. The net cash
position of $1.11 billion was also slightly lower than the $1.14
million in net cash going into the quarter. Including long term
liabilities, the debt to total capital ratio was 42.3%, still at
manageable levels. Days sales outstanding (DSOs) went from 45 to
43. We note that around 40% the assets is goodwill (not a real
Expedia generated $53.3 million of cash from operations in the
last quarter. It spent $59.8 million on capex, $18.1 million on
dividends and $68.3 million on share repurchases.
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 strategic expansion in Asia.
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 this
as well as technology upgrades will negatively impact margins in
the near term, we consider the investment a positive for investors,
since Asia is one of the fastest-growing regions that should give
Expedia the scale required to generate higher profits over the long
Of course, the company will continue to face challenges from
players like Priceline.com ( PCLN ),
Orbitz Worldwide ( OWW )
and Travelocity, as well as a growing number of 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 of #3, which translates to a
short term Hold rating. We remain Neutral on a long-term basis.EXPEDIA INC (EXPE): Free Stock Analysis ReportORBITZ WORLDWID (OWW): Free Stock Analysis
ReportPRICELINE.COM (PCLN): Free Stock Analysis
ReportTo read this article on Zacks.com click here.Zacks Investment