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Expedia Misses Again, Shares Crash - Analyst Blog

Posted
7/26/2013 10:13:00 AM
By: Zacks.com
Referenced Stocks:EXPE;OWW;PCLN;TRIP

Expedia Inc . ( EXPE ) reported second-quarter earnings that were 14 cents short of the Zacks Consensus Estimate on revenue that came in 4.0% lighter than expected. Shares plunged 24% following the announcement.

Revenue

Revenue for the quarter was $1.21 billion, up 19.0% sequentially and 15.9% year over year. The Hotwire brand that was impacted by the domestic car business (fleet constraints and attempts to drive up pricing) in the first quarter did even worse in the second. The hotels side also took a turn for the worse. Additionally, the Hotels.com and Hotwire brands are seeing increased competition from Priceline's ( PCLN ) Booking.com, TripAdvisor ( TRIP ) and Trivago. Year-over-year comps were also impacted by Easter, which fell earlier this year.

Revenue by Segment

Leisure customers remained the significantly larger contributors in the last quarter, generating around 92% of revenue. Corporate customers (Egencia) accounted for the balance. The two segments grew 20.1% and 6.7%, respectively from the previous quarter and were up 15.1% and 25.0%, 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 acquisitions of VIA Travel that closed in the second quarter of 2012 and trivago, which closed in the beginnig 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 71% 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 7% came from Advertising and Media. The three channels were up 16.6%, 15.4% and 73.9%, respectively from the Mar quarter of 2013. Growth from the year-ago quarter was 8.6%, 22.7% and 150.0%, respectively.

Revenue by Geography

Around 54% of Expedia's quarterly revenue was generated domestically, with the remaining 46% coming from international sources. The domestic business grew 16.5% sequentially and 8.2% from a year ago. The international business was up 22.2% sequentially and 26.4% from last year.

Revenue by Product Line

Hotel and Air, the two main product lines grew 12% and 8% respectively from the year-ago quarter. The increase in Hotel revenue came from a 19% increase in room nights supported by a flat average daily rate ("ADR"). Revenue per night dropped 6%. In the last quarter, international room night growth of 29% was more than double the domestic room night growth of 11%.

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.

The increase in ticket revenue was attributable to a 7% increase in ticket volumes and flat airfare. Revenue per ticket increased 1%.

Bookings and Revenue Margin

Gross bookings were $10.12 billion in the last quarter, up 3.5% sequentially and 13.0% year over year. The revenue margin was 11.9%, up 155 bps sequentially and 29 bps from a year ago indicating due to strength in the leisure segment across channels and geographies.

Conversions in both the domestic and international businesses were positive. International conversions were much stronger than domestic (helped by Trivago and eLong) and merchant conversions stronger than agency on a sequential basis. Leisure conversions were better than corporate.

Margins

The pro forma gross margin for the quarter was 78.2%, up 296 bps sequentially and 30 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 23.7% sequential and 16.3% year-over-year increase in gross profit dollars.

The operating expenses of $823.0 million were up 5.1% sequentially and 27.8% from last year. However, the operating margin expanded 1,205 bps sequentially and 610 bps year over year to 9.9%. All expenses declined sequentially as a percentage of sales. Higher marketing expenses compared to the year-ago quarter were more than offset by G&A cuts (as a percentage of sales).

Adjusted EBITDA as reported by the company was $191.7 million, up 82% sequentially and down 14% from the year-ago quarter.

Net Income

On a pro forma basis, Expedia generated a net profit of $88.1 million, or 7.3% net profit margin compared to loss of $21.2 million, or 2.1% in the previous quarter and profit of $114.5 million or 11.0% net income margin in the same quarter last year.

Our pro forma estimate excludes intangibles amortization charges, legal reserves and other items 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 non controlling interests, the GAAP earnings attributable to Expedia shareholders was $71.5 million ($0.77 a share) compared to loss of $104.2 million ($0.77 a share) in the previous quarter and income of $105.2 million ($0.76 a share) in the year-ago quarter.

Balance Sheet

Cash and short term investments totaled $2.27 billion at quarter-end, up $181.1 million during the quarter. The net cash position of $1.02 billion was up from $839.8 million in net cash going into the quarter. Including long term liabilities, the debt to total capital ratio was 49.6%, still at manageable levels. Days sales outstanding (DSOs) went from 43 to 52. We note that nearly 42% of assets is goodwill (not a real asset).

In the last quarter, Expedia generated $318.5 million of cash from operations. It spent $70.7 million on capex, $17.6 million on dividends and $16.7 million on share repurchases.

Our Take

Despite the positive long term trends in online travel booking, Expedia is going through a bad time. It is seeing increasing competition and inventory issues, as well as problems related to TripAdvisor's transition to the metasearch model that is hurting traffic. This in turn is driving it to increase marketing costs, which in turn is impacting its profits. Costs related to recent acquisitions are also adding up.

Another factor is the opportunity in the Asia/Pacific region, which 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. Therefore, it will continue to have a negative impact on profitability until the volumes kick in.

Of course, the company will continue to face challenges from players like Priceline.com , Orbitz Worldwide(OWW), Travelocity and Ctrip.com international , 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 occupancy taxes.

Expedia shares carry a Zacks Rank #3 (Hold).



EXPEDIA INC (EXPE): Free Stock Analysis Report

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